,  LOMBARD  STREET 


A  DESCRIPTION  OF   THE  MONEY  MARKET 


,.    * 

WALTER   BAGEHOT 


NEW   YORK 

CHARLES    SCRIBNER'S    SONS 
1897 


ADVERTISEMENT 


THE  COMPOSITION  of  this  little  book  has  occupied 
a  much  longer  time  than,  perhaps,  my  readers  may 
think  its  length  or  its  importance  deserves.  It 
was  begun  as  long  ago  as  the  autumn  of  1870 ; 
and  though  its  progress  has  been  often  suspended 
by  pressing  occupations  and  imperfect  health,  I 
have  never  ceased  to  work  at  it  when  I  could. 
But  I  fear  that  in  consequence,  in  some  casual 
illustrations  at  least,  every  part  of  the  book  may  not 
seem,  as  the  lawyers  would  say, i  to  speak  from  the 
same  time/  The  figures  and  the  examples  which 
it  is  most  natural  to  use  at  one  time  are  not  quite 
those  which  it  is  most  natural  to  use  at  another  ; 
and  a  slowly  written  book  on  a  living  and  chang- 
ing subject  is  apt  a  little  to  want  unity  in  this 
respect. 

I  fear  that  I  must  not  expect  a  very  favourable 
reception  for  this  work.     It  speaks  mainly  of  four 


Vi  AD  VER  TISEMENT. 

sets  of  persons — the  Bank  of  England,  Joint  Stock 
Banks  other  than  that  Bank,  private  bankers,  and 
bill-brokers ;  and  I  am  much  afraid  that  neither  will 
altogether  like  what  is  said  of  them.  I  can  only 
say  that  the  opinions  now  expressed  have  not  been 
formed  hastily  or  at  a  distance  from  the  facts ;  that, 
on  the  contrary,  they  have  been  slowly  matured  in 
'  Lombard  Street '  itself,  and  that,  perhaps,  as  they 
will  not  be  altogether  pleasing  to  anyone,  I  may 
at  least  ask  for  the  credit  of  having  been  impartial 
in  my  criticism. 

I  should  also  say  that  I  am  indebted  to  a  friend 
for  the  correction  of  the  final  proof  sheets,  which 
an  attack  of  illness  prevented  me  from  fully  re- 
vising. If  it  had  not  been  for  his  kind  assistance, 
the  publication  of  the  book  must  have  been  post-' 
poned  till  the  autumn,  which,  as  its  production  has 
already  been  so  slow,  would  have  been  very 
annoying  to  me. 

WALTER  BAGEHOT. 
THE  POPLARS,  WIMBLEDON. 

April  26,1873. 


CONTENTS 


CHAT.  r*Gi 

I.   INTRODUCTORY I 

II.   A  GENERAL  VIEW  OF  LOMBARD  STREET        .          .          .21 

III.  HOW  LOMBARD  STREET  CAME    TO    EXIST,    AND    WHY 

IT  ASSUMED  ITS  PRESENT  FORM      .          .          .          .7$ 

IV.  THE  POSITION  OF  THE  CHANCELLOR  OF  THE  EXCHE- 

QUER IN  THE  MONEY  MARKET         .          .          .          .    IOI 

V.   THE    MODE    IN    WHICH     THE    VALUE     OF     MONEY     IS 

SETTLED  IN  LOMBARD  STREET          .          .          .          •    "3 

VI.   WHY    LOMBARD    STREET    IS    OFTEN  VERY  DULL,  AND 

SOMETIMES  EXTREMELY  EXCITED      .          .  .         .122 

VII.  A  MORE  EXACT  ACCOUNT  OF  THE  MODE  IN  WHICH 
THE  BANK  OF  ENGLAND  HAS  DISCHARGED  ITS 
DUTY  OF  RETAINING  A  GOOD  BANK  RESERVE,  AND 
OF  ADMINISTERING  IT  EFFECTUALLY  .  .  .  l6o 

VIII.  THE  GOVERNMENT  OF  THE  BANK  OF  ENGLAND  .          .   2O8 
IX    THE  JOINT  STOCK  BANKS 243 


viii  CONTENTS. 

CHAP*  fAGB 

X.  THE  PR.HATE  BANKS         .         .          .          ...          .  267 

XI.  THE  BILL-BROKERS 28 1 

C  XII.  THE  PRINCIPLES  WHICH  SHOULD  REGULATE  THE 
AMOUNT  OF  THE  BANKING  RESERVE  TO  BE  KEPT  BY 
THE  BANK  OF  ENGLAND  .  .  .-  .  .  .30! 

XIII.  CONCLUSION  .          .         .         ,          .          .          . '        .          .329 


APPENDIX.       . 

NOTE  A.      LIABILITIES  AND  CASH  RESERVE  OF    THE  CHIEF 

BANKING  SYSTEMS     .          .  .      V.          .    '     .          .33$ 

NOTE  B.  EXTRACT  FROM  EVIDENCE  GIVEN  BY  MR.  ALDER- 
MAN SALOMONS  BEFORE  THE  HOUSE  OF  COM- 
MONS SELECT  COMMITTEE  IN  1858  .  .  .  337 

rfOTE  C.  STATEMENT  OF  CIRCULATION  AND  DEPOSITS  OF 
THE  BANK  OF  DUNDEE  AT  INTERVALS  OF  TEN 
YEARS,  BETWEEN  1764  AND  1864  .  .'  .  349 

NOTE  D.      MEETING  OF  THE  PROPRIETORS  OF  THE  BANK  OF 

ENGLAND,  SEPTEMBER   13,    1 866         .          .          .350 


LOMBARD    STREET 


CHAPTER  I. 

INTRODUCTORY. 

I  VENTURE  to  call  this  Essay  '  Lombard  Street,' 
and  not  the  '  Money  Market/  or  any  such 
phrase,  because  I  wish  to  deal,  and  to  show 
that  I  mean  to  deal,  with  concrete  realities.  A 
notion  prevails  that  the  Money  Market  is  some- 
thing so  impalpable  that  it  can  only  be  spoken  of 
in  very  abstract  words,  and  that  therefore  books 
on  it  must  always  be  exceedingly  difficult.  But  I 
maintain  that  the  Money  Market  is  as  concrete 
and  real  as  anything  else ;  that  it  can  be 
described  in  as  plain  words  ;  that  it  is  the  writer's 
fault  if  what  he  says  is  not  clear.  In  one  respect, 
however,  I  admit  that  I  am  about  to  take  per- 
haps an  unfair  advantage.  Half,  and  more  than 
half,  of  the  supposed  '  difficulty '  of  the  -Money 
i  » 


2  INTRODUCTORY. 

Market  has  arisen  out  of  the  controversies  as  to 
'  Peel's  Act/  and  the  abstract  discussions  on  the 
theory  on  which  that  act  is  based,  or  supposed  to 
be  based.  But  in  the  ensuing  pages  I  mean  to 
speak  as  little  as  I  can  of  the  Act  of  1844  ;  and 
when  I  do  speak  of  it,  I  shall  deal  nearly  exclu- 
sively with  its  experienced  effects,  and  scarcely  at 
all,  if  at  all,  with  its  refined  basis. 

For  this  I  have  several  reasons, — one,  that  if 
you  say  anything  about  the  Act  of  1844,  it  is  little 
matter  what  else  you  say,  for  few  will  attend  to  it. 
Most  critics  will  seize  on  the  passage  as  to  the 
Act,  either  to  attack  it  or  defend  it,  as  if  it  were  the 
main  point.  There  has  been  so  much  fierce  con- 
troversy as  to  this  Act  of  Parliament — and  there 
is  still  so  much  animosity — that  a  single  sentence 
respecting  it  is  far  more  interesting  to  very  many 
than  a  whole  book  on  any  other  part  of  the  subject. 
Two  hosts  of  eager  disputants  on  this  subject  ask 
of  every  new  writer  the  one  question — Are  you 
with  us  or  against  us  ?  and  they  care  for  little  else. 
Of  course  if  the  Act  of  1844  really  were,  as  is 
commonly  thought,  the  primum  mobile  of  the 
English  Money  Market, — the  source  of  all  good 
according  to  some,  and  the  source  of  all  harm 
according  to  others, — the  extreme  irritation  excited 
by  an  opinion  on  it  would  be  no  reason  for  not 


INTRODUCTORY.  3 

giving  a  free  opinion.  A  writer  on  any  subject 
must  not  neglect  its  cardinal  fact,  for  fear  that 
others  may  abuse  him.  But,  in  my  judgment, 
the  Act  of  1844  is  only  a  subordinate  matter 
in  the  Money  Market ;  what  has  to  be  said  on  it 
has  been  said  at  disproportionate  length  ;  the 
phenomena  connected  with  it  have  been  magni- 
fied into  greater  relative  importance  than  they  at 
all  deserve.  We  must  never  forget  that  a 
quarter  of  a  century  has  passed  since  1844, — a 
period  singularly  remarkable  for  its  material 
progress,  and  almost  marvellous  in  its  banking 
development.  Even,  therefore,  if  the  facts  so 
much  referred  to  in  1844  had  the  importance  then 
ascribed  to  them, — and  I  believe  that  in  some 
respects  they  were  even  then  overstated, — there 
would  be  nothing  surprising  in  finding  that  in  a 
new  world  new  phenomena  had  arisen  which  now 
are  larger  and  stronger.  In  my  opinion  this  is 
the  truth :  since  1844,  Lombard  Street  is  so 
changed  that  we  cannot  judge  of  it  without 
describing  and  discussing  a  most  vigorous  adult 
world  which  then  was  small  and  weak.  On  this 
account  I  wish  to  say  as  little  as  is  fairly  possible 
of  the  Act  of  1844,  and,  as  far  as  I  can,  to  isolate 
and  dwell  exclusively  on  the  *  Post-Peel '  agencies, 
so  that  those  who  have  had  enough  of  that  well* 


4  INTR  OD  UC  TOR  Y. 

worn  theme  (and  they  are  very  many)  may  not  be 
wearied,  and  that  the  new  and  neglected  parts  o' 
tiie  subject  may  be  seen  as  they  really  are. 

The  briefest  and  truest  way  of  describing  Lom- 
]  bard  Street  is  to  say  that  it  is  by  far  the  greatest 
combination  of  economical  power  and  economical 
delicacy  that  the  world  has  ever  seen.  Of  the 
greatness  of  the  power  there  will  be  no  doubt. 
Money  is  economical  power.  Everyone  is  aware 
that  England  is  the  greatest  moneyed  country  in 
the  world ;  everyone  admits  that  it  has  much 
more  immediately  disposable  and  ready  cash  than 
any  other  country.  But  very  few  persons  are 
aware  how  much  greater  the  ready  balance — the 
floating  loan-fund  which  can  be  lent  to  anyone 
or  for  any  purpose — is  in  England  than  it  is  any- 
where else  in  the  world.  A  very  few  figures  will 
show  how  large  the  London  loan-fund  is,  and 
how  much  greater  it  is  than  any  other.  The 
known  deposits — the  deposits  of  banks  which 
publish  their  accounts — are,  in 

£ 

London  (3ist  December,  1872)        .         .        .  120,000,000 

Pins  (2yth  February,  1873)     ....  13,000,000 

New  York  (February,  1873)     ....  40,000,000 

German  Empire  (3ist  January,  1873)       .         .  8,000,000 

And  the  unknown  deposits — the  deposits  in  bank* 
which  do  not  publish  their  accounts — are  in  Londor 


INTRODUCTORY.  5 

much  greater  than  those  in  any  other  of  these 
cities.  The  bankers'  deposits  of  London  are 
many  times  greater  than  those  of  any  other  city 
— those  of  Great  Britain  many  times  greater  than 
those  of  any  other  country. 

Of  course  the  deposits  of  bankers  are  not  a 
strictly  accurate  measure  of  the  resources  of  a 
Money  Market.  On  the  contrary,  much  more  cash 
exists  out  of  banks  in  France  and  Germany,  and 
in  all  non-banking  countries,  than  could  be  found 
in  England  or  Scotland,  where  banking  is  devel 
oped.  But  that  cash  is  not,  so  to  speak,  *  money- 
market  money : '  it  is  not  attainable.  Nothing  but 
their  immense  misfortunes,  nothing  but  a  vast  loan 
in  their  own  securities,  could  have  extracted  the 
hoards  of  France  from  the  custody  of  the  French 
people.  The  offer  of  no  other  securities  would 
have  tempted  them,  for  they  had  confidence  in  no 
other  securities.  For  all  other  purposes  the  money 
hoarded  was  useless  and  might  as  well  not  have 
been  hoarded.  But  the  English  money  is  '  borrow- 
able '  money.  Our  people  are  bolder  in  dealing 
with  their  money  than  any  continental  nation,  and 
even  if  they  were  not  bolder,  the  mere  fact  that 
their  money  is  deposited  in  a  bank  makes  it  far 
more  obtainable.  A  million  in  the  hands  of  a  single 
banker  is  a  great  power ;  he  can  at  once  lend  it 


6  :NTR  ODUC  TOR  Y. 

where  he  will,  and  borrowers  can  come  to  him, 
because  they  know  or  believe  that  he  has  it.  But 
the  same  sum  scattered  in  tens  and  fifties  through 
a  whole  nation  is  no  power  at  all :  no  one  knows 
where  to  find  it  or  whom  to  ask  for  it.  Concen- 
tration of  money  in  banks,  though  not  the  sole 
cause,  is  the  principal  cause  which  has  made  the 
Money  Market  of  England  so  exceedingly  rich, 
so  much  beyond  that  of  other  countries. 

The  effect  is  seen  constantly.  We  are  asked 
to  lend,  and  do  lend,  vast  sums,  which  it  would  be 
impossible  to  obtain  elsewhere.  It  is  sometimes 
said  that  any  foreign  country  can  borrow  in  Lom- 
bard Street  at  a  price  :  some  countries  can  bor- 
row much  cheaper  than  others  ;  but  all,  it  is  said, 
can  have  some  money  if  they  choose  to  pay 
enough  for  it.  Perhaps  this  is  an  exaggeration  ; 
but  confined,  as  of  course  it  was  meant  to  be, 
to  civilised  Governments,  it  is  not  much  of  an 
exaggeration.  There  are  very  few  civilised  Gov- 
ernments that  could  not  borrow  considerable  sums 
cf  us  if  they  choose,  and  most  of  them  seem 
more  and  more  likely  to  choose.  If  any  nation 
v  ants  even  to  make  a  railway — especially  at  all  a 
poor  nation — it  is  sure  to  come  to  this  country — - 
to  the  country  of  banks — for  the  money.  It  is 
true  that  English  bankers  are  not  themselves 


INTRO  D  UCTOX  Y.  y 

very  great  lenders  to  foreign  states.  But  they 
are  great  lenders  to  those  who  lend.  They 
advance  on  foreign  stocks,  as  the  phrase  is,  with 
'  a  margin  ; '  that  is,  they  find  eighty  per  cent, 
of  the  money,  and  the  nominal  lender  finds  the 
rest.  And  it  is  in  this  way  that  vast  works  are 
achieved  with  English  aid  which  but  for  that  aid 
would  never  have  been  planned. 

In  domestic  enterprises  it  is  the  same.  We 
have  entirely  lost  the  idea  that  any  undertaking 
likely  to  pay,  and  seen  to  be  likely,  can  perish  for 
want  of  money  ;  yet  no  idea  was  more  familiar 
to  our  ancestors,  or  is  more  common  now  in 
most  countries.  A  citizen  of  London  in  Queen 
Elizabeth's  time  could  not  have  imagined  our 
state  of  mind.  He  would  have  thought  that  it 
was  of  no  use  inventing  railways  (if  he  could  have 
understood  what  a  railway  meant),  for  you  would 
not  have  been  able  to  collect  the  capital  with 
which  to  make  them.  At  this  moment,  in 
colonies  and  all  rude  countries,  there  is  no  large 
sum  of  transferable  money  ;  there  is  no  fund  fiom 
which  you  can  borrow,  and  out  of  which  you  can 
make  immense  works.  Taking  the  world  as  a 
whole-— either  now  or  in  the  past — it  is  certain 
that  in  poor  states  there  is  no  spare  money  for 
new  and  great  undertakings,  and  that  in  most  rich 


g  INTRODUCTORY. 

» 

states  the  money  is  too  scattered,  and  clings  too 
close  to  the  hands  of  the  owners,  to  be  often 
obtainable  in  large  quantities  for  new  purposes. 
A  place  like  Lombard  Street,  where  in  all  but  the 
rarest  times  money  can  be  always  obtained  upon 
good  security  or  upon  decent  prospects  of  proba- 
ble gain,  is  a  luxury  which  no  country  has  ever 
enjoyed  with  even  comparable  equality  before. 

But  though  these  occasional  loans  to  new  en- 
terprises and  foreign  States  are  the  most  conspic- 
uous instances  of  the  power  of  Lombard  Street, 
they  are  not  by  any  means  the  most  remarkable 
or  the  most  important  use  of  that  power.  English 
trade  is  carried  on  upon  borrowed  capital  to  an 
extent  of  which  few  foreigners  have  an  idea,  and 
none  of  our  ancestors  could  have  conceived.  Ir 
every  district  small  traders  have  arisen,  who  '  dis- 
count their  bills '  largely,  and  with  the  capital  so 
borrowed,  harass  and  press  upon,  if  they  do  not 
eradicate,  the  old  capitalist.  The  new  trader  has 
obviously  an  immense  advantage  in  the  struggle  of 
trade.  If  a  merchant  have  5o,ooo/.  all  his  own, — 
to  gain  10  per  cent,  on  it  he  must  make  5,ooo/.  a 
year,  and  must  charge  for  his  goods  accordingly ; 
but  if  another  has  only  io,ooo/.,  and  borrows 
40,000/1  by  discounts  (no  extreme  instance  in  our 
modern  trade),  he  has  the  same  capital  of  50,000^ 


INTRODUCTOR  V.  g 

to  use,  and  can  sell  much  cheaper.  If  the  rate  at 
which  he  borrows  be  5  per  cent.,  he  will  have  to 
pay  2,ooo/.  a  year ;  and  if,  like  the  old  trader,  he 
make  5,ooo/.  a  year,  he  will  still,  after  paying  his 
interest,  obtain  3,ooo/.  a  year,  or  30  per  cent.,  on 
his  own  io,ooo/.  As  most  merchants  are  content 
with  much  less  than  30  per  cent.,  he  will  be  able, 
if  he  wishes,  to  forego  some  of  that  profit,  lower 
the  price,  of* the  commodity,  and  drive  the  old- 
fashioned  trader — the  man  who  trades  on  his  own 
capital — out  of  the  market.  In  modern  English 
business,  owing  to  the  certainty  of  obtaining  loans 
on  discount  of  bills  "or  otherwise  at  a  moderate 
rate  of  interest,  there  is  a  steady  bounty  on  trad- 
ing with  borrowed  capital,  and  a  constant  dis- 
couragement to  confine  yourself  solely  or  mainly 
to  your  own  capital. 

This  increasingly  democratic  structure  of  English 
commerce  is  very  unpopular  in  many  quarters, 
and  its  effects  are  no  doubt  exceedingly  mixed. 
On  the  one  hand,  it  prevents  the  long  duration  of 
great  families  of  merchant  princes,  such  as  those  of 
Venice  and^Genoa,  who  inherited  nice  cultivation  as 
well  as  great  wealth,  and  who,  to  some  extent,  com- 
bined the  tastes  of  an  aristocracy  with  the  insight 
and  verve  of  men  of  business.  These  are  pushed 
out,  so  to  say,  by  the  dirty  crowd  of  little  men.  After 


r  O  INTR  OD  UC  TOR  Y. 

a  generation  or  two  they  retire  into  idk  luxury, 
Upon  their  immense  capital  they  can  only  obtain 
low  profits,  and  these  they  do  not  think  enough  to 
compensate  them  for  the  rough  companions  and 
rude  manners  they  must  meet  in  business.  Thi? 
constant  levelling  of  our  commercial  houses  is, 
too,  unfavourable  to  commercial  morality.  Great 
firms,  with  a  reputation  which  they  have  re- 
ceived from  the  past,  and  which  they  wish  to 
transmit  to  the  future,  cannot  be  guilty  of  small 
frauds.  They  live  by  a  continuity  of  trade,  which 
detected  fraud  would  spoil.  When  we  scrutinise 
the  reason  of  the  impaired  reputation  of  English 
goods,  we  find  it  is  the  fault  of  new  men  with  lit- 
tle money  of  their  own,  created  by  bank  'dis- 
counts.' These  men  want  business  at  once,  and 
they  produce  an  inferior  article  to  get  it.  They 
rely  on  cheapness,  and  rely  successfully. 

But  these  defects  and  others  in  the  democratic 
structure  of  commerce  are  compensated  by  one 
great  excellence.  No  country  of  great  hereditary 
trade,  no  European  country  at  least,  was  ever  so 
little  '  sleepy/  to  use  the  only  fit  word,  as  England ; 
no  other  was  ever  so  prompt  at  once  to  seize  ne\\ 
advantages.  A  country  dependent  mainly  on  great 
'  merchant  princes  '  will  never  be  so  prompt ;  their 
commerce  perpetually  slips  more  and  more  into  a 


INTROD  UCTOR  Y.  1  \ 

commerce  of  routine.  A  man  of  large  wealth,  how- 
ever intelligent,  always  thinks,  more  or  less — '  I 
have  a  great  income,  and  I  want  to  keep  it.  li 
things  go  on  as  they  are  I  shall  certainly  keep  it; 
but  if  they  change  I  may  not  keep  it.'  Conse- 
quently he  considers  every  change  of  circumstance 
a  '  bore,'  and  thinks  of  such  changes  as  little  as  he 
can.  But  a  new  man,  who  has  his  way  to  make 
in  the  world,  knows  that  such  changes  are  his  op- 
portunities ;  he  is  always  on  the  look-out  for  them, 
and  always  heeds  them  when  he  finds  them. 
The  rough  and  vulgar  structure  of  English 
commerce  is  the  secret  of  its  life  ;  for  it  contains 
'  the  propensity  to  variation,'  which,  in  the 
social  as  in  the  animal  kingdom,  is  the  principle 
of  progress. 

In  this  constant  and  chronic  borrowing,  Lom- 
bard Street  is  the  great  go-between.  It  is  a  sort 
of  standing  broker  between  quiet  saving  districts 
of  the  country  and  the  active  employing  districts. 
Why  particular  trades  settled  in  particular  places 
it  is  often  difficult  to  say  ;  but  one  thing  is  certain, 
that  when  a  trade  has  settled  in  any  one  spot,  it 
is  very  difficult  for  another  to  oust  it — impossible 
unless  the  second  place  possesses  some  very  great 
intrinsic  advantage.  Commerce  is  curiously  con 
servative  in  its  homes,  unless  it  is  imperiously 


I2  INTRODUCTORY. 

obliged  to  migrate.  Partly  from  this  cause,  and 
partly  from  others,  there  are  whole  districts  in 
England  which  cannot  and  do  not  employ  theii 
own  money.  No  purely  agricultural  county  doer 
so.  The  savings  of  a  county  with  good  land  but 
no  manufactures  and  no  trade  much  exceed  what 
can  be  safely  lent  in  the  county.  These  savings 
are  first  lodged  in  the  local  banks,  are  by  them 
sent  to  London,  and  are  deposited  with  London 
bankers,  or  with  the  bill  brokers.  In  either  case 
the  result  is  the  same.  The  money  thus  sent 
up  from  the  accumulating  districts  is  employed 
in  discounting  the  bills  of  the  industrial  districts. 
Deposits  are  made  with  the  bankers  and  bill 
brokers  in  Lombard  Street  by  the  bankers  of  such 
counties  as  Somersetshire  and  Hampshire,  and 
those  bill  brokers  and  bankers  employ  them 
in  the  discount  of  bills  from  Yorkshire  and 
Lancashire.  Lombard  Street  is  thus  a  perpetual 
agent  between  the  two  great  divisions  of  Eng- 
land,—  between  the  rapidly-growing  districts, 
where  almost  any  amount  of  money  can  be  well 
and  easily  employed,  and  the  stationary  and  the 
declining  districts,  where  there  is  more  money 
than  can  be  used. 

This    organisation    is    so   useful   because  it  is 
so  easily  adjusted.     Political  economists  say  that 


INTR  OD  UCTOR  Y.  1 3 

capital  sets  towards  the  most  profitable  trades, 
and  that  it  rapidly  leaves  the  less  profitable, 
and  non-paying  trades.  But  in  ordinary  countries 
tliis  is  a  slow  process,  and  some  persons  who 
want  to  have  ocular  demonstration  of  abstract 
truths  have  been  inclined  to  doubt  it  because  they 
could  not  see  it.  In  England,  however,  the 
process  would  be  visible  enough  if  you  could  only 
see  the  books  of  the  bill  brokers  and  the  bankers. 
Their  bill  cases  as  a  rule  are  full  of  the  bills 
drawn  in  the  most  profitable  trades,  and  c<zteris 
paribus  and  in  comparison  empty  of  those  drawn 
in  the  less  profitable.  If  the  iron  trade  ceases  to 
be  as  profitable  as  usual,  less  iron  is  sold  ;  the 
fewer  the  sales  the  fewer  the  bills ;  and  in 
consequence  the  number  of  iron  bills  in  Lombard 
street  is  diminished.  On  the  other  hand,  if  in 
consequence  of  a  bad  harvest  the  corn  trade 
becomes  on  a  sudden  profitable,  immediately 
'  corn  bills  '  are  created  in  great  numbers,  and  if 
good  are  discounted  in  Lombard  Street.  Thus 
English  capital  runs  as  surely  and  instantly  where 
it  is  most  wanted,  and  where  there  is  most  to  be 
made  of  it,  as  water  runs  to  find  its  level. 

This  efficient  and  instantly-ready  organisation 
gives  us  an  enormous  advantage  in  competition 
with  less  advanced  countries — less  advanced,  that 


14  INTRODUCTORY, 

is,  in  this  particular  respect  of  credit.  In  a  new 
trade  English  capital  is  instantly  at  the  disposal  of 
persons  capable  of  understanding  the  new  oppor- 
tunities and  of  making  good  use  of  them.  In 
countries  where  there  is  little  money  to  lend,  and 
where  that  little  is  lent  tardily  and  reluctantly, 
enterprising  traders  are  long  kept  back,  because 
they  cannot  at  once  borrow  the  capital,  without 
which  skill  and  knowledge  are  useless.  All  sudden 
trades  come  to  England,  and  in  so  doing  often 
disappoint  both  rational  probability  and  the  pre- 
dictions of  philosophers.  The  Suez  Canal  is  a 
curious  case  of  this.  All  predicted  that  the  canal 
would  undo  what  the  discovery  of  the  passage  to 
India  round  the  Cape  effected.  Before  that  all 
Oriental  trade  went  to  ports  in  the  South  of 
Europe,  and  was  thence  diffused  through  Europe. 
That  London  and  Liverpool  should  be  centres  o) 
East  Indian  commerce  is  a  geographical  anomaly, 
which  the  Suez  Canal,  it  was  said,  would  rectify. 
'  The  Greeks,'  said  M.  de  Tocqueville,  '  the 
Styrians,  the  Italians,  the  Dalmatians,  and  the 
Sicilians,  are  the  people  who  will  use  the  Canal  il 
any  use  it/  But,  on  the  contrary,  the  main  use  oi 
the  Canal  has  been  by  the  English.  None  of  the 
nations  named  by  Tocqueville  had  the  capital,  01 
a  tithe  of  it,  ready  to  build  the  large  screw 


INTR  OD  UC  TORY.  \  J 

steamers  which  alone  can  use  the  Canal  profitably. 
Ultimately  these  plausible  predictions  may  or  may 
not  be  right,  but  as  yet  they  have  been  quite 
wrong,  not  because  England  has  rich  people- 
there  are  wealthy  people  in  all  countries — but  be- 
cause she  possesses  an  unequalled  fund  of  floating 
money,  which  will  help  in  a  moment  any  merchant 
who  sees  a  great  prospect  of  new  profit. 

And  not  only  does  this  unconscious  '  organisa- 
tion of  capital,7  to  use  a  continental  phrase,  make 
the  English  specially  quick  in  comparison  with 
their  neighbours  on  the  continent  at  seizing  on 
novel  mercantile  opportunities,  but  it  makes  them 
likely  also  to  retain  any  trade  on  which  they  have 
once  regularly  fastened.  Mr.  Macculloch,  following 
Ricardo,  used  to  teach  that  all  old  nations  had  a 
special  aptitude  for  trades  in  which  much  capital 
is  required.'  The  interest  of  capital  having  been 
reduced  in  such  countries,  he  argued,  by  the 
necessity  of  continually  resorting  to  inferior  soils, 
they  can  undersell  countries  where  profit  is  high 
in  all  trades  needing  great  capital.  And  in  this 
theory  there  is  doubtless  much  truth,  though  it 
can  only  be  applied  in  practice  after  a  number  of 
limitations  and  with  a  number  of  deductions  of 
which  the  older  school  of  political  economists  did 
not  take  enough  notice.  But  the  same  principle 


1 6  INTR  OD  UC  TOR  Y. 

plainly  and  practically  applies  to  England,  in  con- 
sequence of  her  habitual  use  of  borrowed  capital. 
Ar,  has  been  explained,  a  new  man,  with  a  small 
capital  of  his  own  and  a  large  borrowed  capital, 
can  undersell  a  rich  man  who  depends  on  his  own 
capital  only.  The  rich  man  wants  the  full  rate  oi 
mercantile  profit  on  the  whole  of  the  capital  em- 
ployed  in  his  trade,  but  the  poor  man  wants  only 
the  interest  of  money  (perhaps  not  a  third  of  the 
rate  of  profit)  on  very  much  of  what  he  uses,  and 
therefore  an  income  will  be  an  ample  recompense 
to  the  poor  man  which  would  starve  the  rich  man 
out  of  the  trade.  All  the  common  notions  about 
the  new  competition  of  foreign  countries  with 
England  and  its  dangers — notions  in  which  there 
is  in  other  aspects  much  truth — require  to  be 
reconsidered  in  relation  to  this  aspect.  England 
has  a  special  machinery  for  getting  into  trade  new 
men  who  will  be  content  with  low  prices,  and 
this  machinery  will  probably  secure  her  success, 
for  no  other  country  is  soon  likely  to  rival  it  ef- 
fectually. 

There  are  many  other  points  which  might  be 
insisted  on,  but  it  would  be  tedious  and  useless  to 
elaborate  the  picture.  The  main  conclusion  is  very 
plain — that  English  trade  is  become  essentially 
a  trade  on  borrowed  capital,  and  that  it  is  only  by 


INTRO D  UC  TOR  V.  1 7 

this  refinement  of  our  banking  system  that  we  are 
able  to  do  the  sort  of  trade  we  do,  or  to  get 
through  the  quantity  of  it. 

But  in  exact  proportion  to  the  power  of  this 
system  Is  its  delicacy — I  should  hardly  say  too 
much  if  I  said  its  danger.  Only  our  familiarity 
blinds  us  to  the  marvellous  nature  of  the  system. 
There  never  was  so  much  borrowed  money  col- 
lected in  the  world  as  is  now  collected  in  London. 
Of  the  many  millions  in  Lombard  street,  infinitely 
the  greater  proportion  is  held  by  bankers  or 
others  on  short  notice  or  on  demand;  that  is 
to  say,  the  owners  could  ask  for  it  all  any  day 
they  please :  in  a  panic  some  of  them  do  ask 
for  some  of  it.  If  any  large  fraction  of  that 
money  really  was  demanded,  our  banking  system 
and  our  industrial  system  too  would  be  in  great 
danger. 

Some  of  those  deposits  too  are  of  a  peculiar  and 
very  distinct  nature.  Since  the  Franco-German 
war,  we  have  become  to  a  much  larger  extent  than 
before  the  Bankers  of  Europe.  A  very  large  sum 
of  foreign  money  is  on  various  accounts  and  for 
various  purposes  held  here.  And  in  a  time  of 
panic  it  might  be  asked  for.  In  1866  we  held 
only  a  much  smaller  sum  of  foreign  money,  but 
that  smaller  sum  was  demanded  and  we  had  to  pay 


1 8  .       INTR  OD  UC  TOR  Y. 

it  at  great  cost  and  suffering,  and  it  would  be 
far  worse  if  we  had  to  pay  the  greater  sums  we 
now  hold,  without  bettor  resources  than  we  had 
then, 

It  may  be  replied,  that  though  our  instant 
liabilities  are  great,  our  present  means  are  large  ; 
that  though  we  have  much  we  may  be  asked  to 
pay  at  any  moment,  we  have  very  much  always 
ready  to  pay  it  with.  But,  on  the  contrary,  there 
is  no  country  at  present,  and  there  never  was  any 
country  before,  in  which  the  ratio  of  the  cash  re- 
serve to  the  bank  deposits  was  so  small  as  it  is 
now  in  England.*  So  far  from  our  being  able  to 
rely  on  the  proportional  magnitude  of  our  cash  in 
hand,  the  amount  of  that  cash  is  so  exceedingly 
small  that  a  bystander  almost  trembles  when  he 
compares  its  minuteness  with  the  immensity  oi 
the  credit  which  rests  upon  it. 

Again,  it  may  be  said  that  we  need  not  be 
alarmed  at  the  magnitude  of  our  credit  system  or 
nt  its  refinement,  for  that  we  have  learned  by  ex- 
perience the  way  of  controlling  it,  and  always 
manage  it  with  discretion.  But  we  do  not 
always  manage  it  with  discretion.  There  is  the 
astounding  instance  of  Overend,  Gurney,  and  Co 
to  the  contrary.  Ten  years  ago  that  house  stood 
*  See  Note  A  at  the  end  of  th?  volume. 


INTR  OD  UC  TOR  Y.  ig 

next  to  the  Bank  of  England  in  the  City  of 
London;  it  was  better  known  abroad  than  any 
similar  firm — known,  perhaps,  better  than  any 
purely  English  firm.  The  partners  had  great 
estates,  which  had  mostly  been  made  in  the 
business.  They  still  derived  an  immense  income 
from  it.  Yet  in  six  years  they  lost  all  their 
own  wealth,  sold  the  business  to  the  com- 
pany, and  then  lost  a  large  part  of  the  com- 
pany's capital.  And  these  losses  were  made  in 
a  manner  so  reckless  and  so  foolish,  that  one 
would  think  a  child  who  had  lent  money  in  the 
City  of  London  would  have  lent  it  better.  After 
this  example,  we  must  not  confide  too  surely  in 
long-established  credit,  or  in  firmly-rooted  tradi- 
tions of  business.  We  must  examine  the  system 
on  which  these  great  masses  of  money  are 
manipulated,  and  assure  ourselves  that  it  is  safe 
and  right. 

But  it  is  not  easy  to  rouse  men  of  business  to 
the  task.  They  let  the  tide  of  business  float 
before  them  ;  they  make  money  or  strive  to  do  so 
\vhile  it  passes,  and  they  are  unwilling  to  think 
where  it  is  going.  Even  the  great  collapse  of 
Overends,  though  it  caused  a  panic,  is  beginning 
to  be  forgotten.  Most  men  of  business  think — • 
1  Anyhow  this  system  will  probably  last  my  time, 


2Q  'INT  ROD  UC  TOR  Y. 

It  has  gone  on  a  long  time,  and  is  likely  to  go  on 
still.'  But  the  exact  point  is,  that  it  has  not  gone 
on  a  long  time.  The  collection  of  these  immense 
sums  in  one  place  and  in  few  hands  is  perfectly 
new.  In  1 844  the  liabilities  of  the  four  great  London 
Joint  Stock  Banks  were  10,63 7, ooo/.  5  tneY  nou 
are  more  than  6o,ooo,ooo/.  The  private  deposits 
of  the  Bank  of  England  then  were  9,ooo,ooo/.  ; 
they  now  are  i8,ooo,ooo/.  There  was  in  1844 
throughout  the  country  but  a  fraction  of  the  vasf 
deposit  business  which  now  exists.  We  cannot 
appeal,  therefore,  to  experience  to  prove  the  safety 
of  our  system  as  it  now  is,  for  the  present  magni- 
tude of  that  system  is  entirely  new.  Obviously  a 
system  may  be  fit  to  regulate  a  few  millions,  and 
yet  quite  inadequate  when  it  is  set  to  cope  with 
many  millions.  And  thus  it  may  be  with  '  Lom- 
bard Street/  so  rapid  has  been  its  growth,  and  so 
unprecedented  is  its  nature. 

I  am  by  no  means  an  alarmist.  I  believe  that 
our  system,  though  curious  and  peculiar,  may  be 
worked  safely ;  but  if  we  wish  so  to  work  it,  we 
must  study  it.  We  must  not  think  we  have  an 
easy  task  when  we  have  a  difficult  task,  or  that 
we  are  living  in  a  natural  state  when  we  are 
really  living  in  an  artificial  one.  Money  will  not 
manage  itself,  and  Lombard  street  has  a  great 
deal  of  money  to  manage. 


CHAPTER    II. 

A    GENERAL    VIEW    OF    LOMBARD    STREET. 
I. 

THE  objects  which  you  see  in  Lombard  Street, 
and  in  that  money  world  which  is  grouped  about 
it,  are  the  Bank  of  England,  the  Private  Banks, 
the  Joint  Stock  Banks,  and  the  bill  brokers. 
But  before  describing  each  of  these  separately  we 
must  look  at  what  all  have  in  common,  and  at  the 
relation  of  each  to  the  others. 

The  distinctive  function  of  the  banker,  says 
Ricardo,  '  begins  as  soon  as  he  uses  the  money  of 
others  ;  '  as  long  as  he  uses  his  own  money  he  is 
only  a  capitalist.  Accordingly  all  the  banks  in 
Lombard  Street  (and  bill  brokers  are  for  this 
purpose  only  a  kind  of  bankers)  hold  much  money 
belonging  to  other  people  on  running  account  and 
on  deposit.  In  continental  language,  Lombard 
Street  is  an  organization  of  credit,  and  we  are  to 
see  if  it  is  a  good  or  bad  organization  in  its  kind 


22          4    GENERAL    VIE IV  OF   LOMBARD  STREET 

or  if,  as  is  most  likely,  it  turn  out  to  be  mixed, 
\vhat  are  its  merits  and  what  are  its  defects'? 

The  main  point  on  which  one  system  of  credit 
differs  from  another  is  ' soundness.'  Credit  meana 
that  a  certain  confidence  is  given,  and  a  certain 
trust  reposed.  Is  that  trust  justified  ?  and  is  that 
confidence  wise  ?  These  are  the  cardinal  questions. 
To  put  it  more  simply — credit  is  a  set  of  promises 
to  pay  ;  will  those  promises  be  kept  ?  Especially 
in  banking,  where  the  '  liabilities,'  or  promises  to 
pay,  are  so  large,  and  the  time  at  which  to  pay 
them,  if  exacted,  is  so  short,  an  instant  capacity  to 
meet  engagements  is  the  cardinal  excellence. 

All  which  a  banker  wants  to  pay  his  creditors 
is  a  sufficient  supply  of  the  legal  tender  of  the 
country,  no  matter  what  that  legal  tender  may  be. 
Different  countries  differ  in  their  laws  of  legal 
tender,  but  for  the  primary  purposes  of  banking 
these  systems  are  not  material.  A  good  system 
of  currency  will  benefit  the  country,  and  a  bad 
system  will  hurt  it.  Indirectly,  bankers  will  be 
benefited  or  injured  with  the  country  in  which 
l.hey  live  ;  but  practically,  and  for  the  purposes  of 
their  daily  life,  they  have  no  need  to  think,  and 
never  clo  think,  on  theories  of  currency.  They 
look  at  the  matter  simply.  They  say — '  I  am 
under  an  obligation  to  pay  such  and  such  sums  of 


A    GENERAL    VIE IV  OF  LOMBARD    STREET.          2$ 

legal  currency  ;  how  much  have  I  in  my  till,  or 
have  I  at  once  under  my  command,  of  that 
currency  ?  '  In  America,  for  example,  it  is  quite 
enough  for  a  banker  to  hold  '  greenbacks,'  though 
the  value  of  these  changes  as  the  Government 
chooses  to  enlarge  or  contract  the  issue.  But  a 
practical  New  York  banker  has  no  need  to  think 
of  the  goodness  or  badness  of  this  system  at  all ; 
he  need  only  keep  enough  '  greenbacks  '  to  pay  all 
probable  demands,  and  then  he  is  fairly  safe  from 
the  risk  of  failure. 

By  the  law  of  England  the  legal  tenders  are 
gold  and  silver  coin  (the  last  for  small  amounts 
only),  and  Bank  of  England  notes.  But  the 
number  of  our  attainable  bank  notes  is  not,  like 
American  'greenbacks,'  dependent  on  the  will  of 
the  State  ;  it  is  limited  by  the  provisions  of  the 
Act  of  1844.  That  Act  separates  the  Bank  o! 
England  into  two  halves.  The  Issue  Department 
only  issues  notes,  and  can  only  issue  i5,ooo,ooo/« 
on  Government  securities  ;  for  all  the  rest  it  must 
have  bullion  deposited.  Take,  for  example  an 
account,  which  may  be  considered  an  average 
specimen  of  those  of  the  last  few  years-  -that  for 
the  last  week  of  1 869  :— 


A    GENERAL    VIEW  OF  LOMBARD  STREET. 


An  etccount  pursuant  to  the  Act  'jth  and  8///    Victoria,  cap.  32, 
Jortne  week  ending  on  Wednesday,  the  2$th  day  of  Dccembet , 
1809. 


ISSUE  DEPARTMENT. 


Notes  issued 


33,288,640 


33,288,640 


Government  debt  .  11,015,100 

Other  securities      .  3,984,900 
Gold  coin  and  bul- 
lion     .         .         .  18,288,640 
Silver  bullion  — 


33,288,640 


BANKING  DEPARTMENT. 


Government    se- 
curities       .         .   13,811,955 
Other  securities       .19,781,988 
Notes      .        .         .  10,389,690 
Gold  and  silver  coin       907,982 


Proprietors' capital     14,553,000 

Rest        .         .    .-.     3,103,301 

Public  deposits,  in- 
cluding Excheq- 
uer, Savings' 
Banks,  Commis- 
sioners of  Na- 
tional Debt,  and 
dividend  ac- 
counts .  .  8,585,215 

Other  deposits         .   18,204,607 

Seven-day  and  other 
bills  .  .  445,490 

44,891,613  44,891,61] 

GEO.  FORBES,  Chief  Cashier, 
Date  1  the  3oth  December,  1869. 


A   GENERAL    VIEW  OF  LOMBARD  STREET.         2$ 

There  are  here  i5,ooo,ooo/.  bank  notes  issued  on 
securities,  and  18,288, 64.01.  represented  by  bullion. 
The  Bank  of  England  has  no  power  by  law 
to  increase  the  currency  in  any  other  manner.  It 
holds  the  stipulated  amount  of  securities,  and  for 
all  the  rest  it  must  have  bullion.  This  is  the 
'  cast  iron '  system-  -the  'hard  and  fast'  line  which 
the  opponents  of  the  Act  say  ruins  us,  and  which 
the  partizans  of  the  Act  say  saves  us.  But  I 
have  nothing  to  do  with  its  expediency  here.  All 
which  is  to  my  purpose  is  that  our  paper  '  legal 
tender/  our  bank  notes,  can  only  be  obtained  in 
this  manner.  If,  therefore,  an  English  banker 
retains  a  sum  of  Bank  of  England  notes  or  coin 
in  due  proportion  to  his  liabilities,  he  has  a  suffi- 
cient amount  of  the  legal  tender  of  this  country, 
and  he  need  not  think  of  anything  more. 

But  here  a  distinction  must  be  made.  It  is  to  be 
observed  that  properly  speaking  we  should  not  in- 
clude in  the  '  reserve '  of  a  bank  '  legal  tenders/  or 
cash,  which  the  Bank  keeps  to  transact  its  daily 
business.  That  is  as  much  a  part  of  its  daily 
stock-in-trade  as  its  desks  or  offices ;  or  at  any  rate, 
whatever  words  we  may  choose  to  use,  we  must 
carefully  distinguish  between  this  cash  in  the  till 
which  is  wanted  every  day,  and  the  safety-fund,  as 
we  may  call  it,  the  special  reserve  held  by  the 


26         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

bank  to  meet  extraordinary  and  imfrequent  de- 
mands. 

What  then,  subject  to  this  preliminary  ex« 
planation,  is  the  amount  of  legal  tender  held  by  our 
bankers  against  their  liabilities  ?  The  answer  is 
remarkable,  and  is  the  key  to  our  whole  system. 
It  may  be  broadly  said  that  no  bank  in  London  or 
out  of  it  holds  any  considerable  sum  in  hard  cash 
or  legal  tender  (above  what  is  wanted  for  its  daily 
business)  except  the  Banking  Department  of  the 
Bank  of  England.  That  department  had  on  the 
2Qth  day  of  December,  1869,  liabilities  as  fol- 
lows :--- 

£ 

Public  deposits        .         .         .         .        .       8,585,000 

Private  deposits 18,205,000 

Seven-day  and  other  bills        .        .         .          445,000 

Total  ....     27,235,000 

and  a  cash  reserve  of  i  i,297,ooo/.  And  this  is  all 
the  cash  reserve,  we  must  carefully  remember, 
which,  under  the  law,  the  Banking  Department  ol 
the  Bank  of  England — as  we  cumbrously  call  it — 
the  Bank  of  England  for  banking  purposes — 
possesses.  That  department  can  no  more  multiply 
or  manufacture  bank  notes  than  any  other  bank 
can  multiply  them.  At  that  particular  day  the 
Banlr  of  England  had  only  1 1,297,0007.  in  its  til] 

O 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         2; 

against  liabilities  of  nearly  three  times  the  amount. 
It  had  '  Consols '  and  other  securities  which  it 
could  offer  for  sale  no  doubt,  and  which,  if  sold, 
would  augment  its  supply  of  bank  notes — and  the 
relation  of  such  securities  to  real  cash  will  be  dis- 
cussed presently  ;  but  of  real  cash,  the  Bank  of 
England  for  this  purpose — the  banking  bank — had 
then  so  much  and  no  more. 

And  we  may  well  think  this  a  great  deal,  if  we 
examine  the  position  of  other  banks.  No  other 
bank  holds  any  amount  of  substantial  importance 
in  its  own  till  beyond  what  is  wanted  for  daily  pur- 
poses. All  London  banks  keep  their  principal 
reserve  on  deposit  at  the  Banking  Department  of 
the  Bank  of  England.  This  is  by  far  the  easiest 
and  safest  place  for  them  to  use.  The  Bank  of 
England  thus  has  the  responsibility  of  taking  care 
of  it.  The  same  reasons  which  make  it  desirable 
for  a  private  person  to  keep  a  banker  make  it  also 
desirable  for  every  banker,  as  respects  his  reserve, 
to  bank  with  another  banker  if  he  safely  can.  The 
custody  of  very  large  sums  in  solid  cash  entails 
much  care,  and  some  cost ;  everyone  wishes  to  shift 
these  upon  others  if  he  can  do  so  without  suffering. 
Accordingly,  the  other  bankers  of  London,  having 
perfect  confidence  in  the  Bank  of  England,  get 
that  bank  to  keep  their  reserve  for  them. 


*g         A    GENERAL    VIEW  OF   LOMBARD  STREET. 

The  London  bill  brokers  do  much  the  same. 
Indeed,  they  are  only  a  special  sort  of  bankers  who 
allow  daily  interest  on  deposits,  and  who  for  most 
of  their  money  give  security.  But  we  have  no 
concern  now  with  these  differences  of  detail.  The 
bill  brokers  lend  most  of  their  money,  and  deposit 
the  remnant  either  with  the  Bank  of  England  or 
some  London  banker.  That  London  banker  lends 
what  he  chooses  of  it,  the  rest  he  leaves  at  the 
Bank  of  England.  You  always  come  back  to  the 
Bank  of  England  at  last. 

But  those  who  keep  immense  sums  with  a  banker 
gain  a  convenience  at  the  expense  of  a  danger. 
They  are  liable  to  lose  them  if  the  bank  fail.  As 
all  other  bankers  keep  their  banking  reserve  at  the 
Bank  of  England,  they  are  liable  to  fail  if  it  fails. 
They  are  dependent  on  the  management  of  the 
Bank  of  England  in  a  day  of  difficulty  and  at  a 
crisis  for  the  spare  money  they  keep  to  meet  that 
difficulty  and  crisis.  And  in  this  there  is  certainly 
considerable  risk.  Three  times  '  Peel's  Act '  has 
been  suspended  because  the  Banking  Department 
was  empty.  Before  the  Act  was  broken— 

£ 

In  1847,  the  Banking  Department  was  reduced  to     1,994,000 
1857  ,,  „  1,462,000 

1866  ,,  „  3,000,000 

In  fact,  in  none  of  those  years  could  the  Banking 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         2$ 

Department  of  the  Bank  of  England  have  sur- 
vived if  the  law  had  not  been  broken. 

Nor  must  it  be  fancied  that  this  danger  is 
unreal,  artificial,  and  created  by  law.  There  is 
a  risk  of  our  thinking  so,  because  we  hear  that 
the  danger  can  be  cured  by  breaking  an  Act  ; 
but  substantially  the  same  danger  existed  before 
the  Act.  In  1825,  when  only  coin  was  a  legal 
tender,  and  when  there  was  only  one  department 
in  the  Bank,  the  Bank  had  reduced  its  reserve  to 
i,O27,ooo/.,  and  was  within  an  ace  of  stopping 
payment. 

But  the  danger  to  the  depositing*  banks  is  not 
the  sole  or  the  principal  consequence  of  this  mode 
of  keeping  the  London  reserve.  The  main  effect 
is  to  cause  the  reserve  to  be  much  smaller  in 
proportion  to  the  liabilities  than  it  would  other- 
wise be.  The  reserve  of  the  London  bankers 
being  on  deposit  in  the  Bank  of  England,  the  Bank 
always  lends  a  principal  part  of  it.  Suppose,  a 
favourable  supposition,  that  the  Banking  De- 
partment holds  more  than  two-fifths  of  its  lia- 
bilities in  cash — that  it  lends  three-fifths  of  its 
deposits  and  retains  in  reserve  only  two-fifths. 
If  then  the  aggregate  of  the  bankers'  deposited 
reserve  be  5,ooo,ooo/.,  3,000, ooo/.  of  it  will 
be  lent  by  the  Banking  Department,  and 


30         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

2>ooo,ooo/.  will  be  kept  in  the  till.  In  conse- 
quence, that  2,ooo,ooo/.  is  all  which  is  really  held 
in  actual  cash  as  against  the  liabilities  of  the 
depositing  banks.  If  Lombard  Street  were  on  a 
sudden  thrown  into  liquidation,  and  made  to  pay 
as  much  as  it  could  on  the  spot,  that  2,ooo,ooo/. 
would  be  all  which  the  Bank  of  England  could 
pay  to  the  depositing  banks,  and  consequently  all, 
besides  the  small  cash  in  the  till,  which  those 
banks  could  on  a  sudden  pay  to  the  persons  who 
have  deposited  with  them.  A* 

We  see  then  that  the  banking  reserve  of  the 
Bank  of  England — some  io,ooo,ooo/.  on  an  aver- 
age of  years  now,  and  formerly  much  less — is  all 
which  is  held  against  the  liabilities  of  Lombard 
Street ;  and  if  that  were  all,  we  might  well  be 
amazed  at  the  immense  development  of  our  credit 
system — in  plain  English,  at  the  immense  amount 
of  our  debts  payable  on  demand,  and  the  small - 
ness  of  the  sum  of  actual  money  which  we  keep 
to  pay  them  if  demanded.  But  there  is  more  to 
come.  Lombard  Street  is  not  only  a  place  requir- 
ing to  keep  a  reserve,  it  is  itself  a  place  where  re- 
serves are  kept.  All  country  bankers  keep  their  re- 
serve in  London.  They  only  retain  in  each  country 
town  the  minimum  of  cash  necessary  to  the  trans- 
action of  the  current  business  of  that  country  town 


A    GEN'ERAL    VIEW  OF  LOMBARD   STREET.         31 

Long  experience  has  told  them  to  a  nicety  how 
much  this  is,  and  they  do  not  waste  capital  and 
lose  profit  by  keeping  more  idle.  They  send  the 
money  to  London,  invest  a  part  of  it  in  securities, 
and  keep  the  rest  with  the  London  bankers  and 
the  bill  brokers.  The  habit  of  Scotch  and  Irish 
bankers  is  much  the  same.  All  their  spare  money 
is  in  London,  and  is  invested  as  all  other  London 
money  now  is ;  and,  therefore,  the  reserve  in 
the  Banking  Department  of  the  Bank  of  England 
is  the  banking  reserve  not  only  of  the  Bank  of 
England,  but  of  all  London — and  not  only  of 
all  London,  but  of  all  England,  Ireland,  and 
Scotland  too. 

Of  late  there  has  been  a  still  further  increase 
in  our  liabilities.  Since  the  Franco-German  war, 
we  may  be  said  to  keep  the  European  reserve 
also.  Deposit  Banking  is  indeed  so  small  on 
the  Continent,  that  no  large  reserve  need  be 
held  on  account  of  it.  A  reserve  of  the  same 
sort  which  is  needed  in  England  and  Scotland 
is  not  needed  abroad.  But  all  great  commu- 
nities have  at  times  to  pay  large  sums  in  casru 
and  of  that  cash  a  great  store  must  be  kept 
somewhere.  Formerly  there  were  two  such  stores 
in  Europe,  one  was  the  Bank  of  France,  and  the 
other  the  Bank  of  England.  But  since  the 


32         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

suspension  of  specie  payments  by  the  Bank  of 
France,  its  use  as  a  reservoir  of  specie  is  at  an 
end.  No  one  can  draw  a  cheque  on  it  and  -be 
sure  of  getting  gold  or  silver  for  that  cheque. 
Accordingly  the  whole  liability  for  such  inter- 
national payments  in  cash  is  thrown  on  the 
Bank  of  England.  No  doubt  foreigners  cannot 
take  from  us  our  own  money  ;  they  must  send 
here  '  value  '  in  some  shape  or  other  for  all  they 
take  away.  But  they  need  not  send  '  cash  ;  '  they 
may  send  good  bills  and  discount  them  in 
Lombard  Street  and  take  away  any  part  of  the 
produce,  or  all  the  produce,  in  bullion.  It  is  only 
putting  the  same  point  in  other  words  to  say  that 
all  exchange  operations  are  centering  more  and 
more  in  London.  Formerly  for  many  purposes 
Paris  was  a  European  settling-house,  but  now  it 
has  ceased  to  be  so.  The  note  of  the  Bank  of 
France  has  not  indeed  been  depreciated  enough 
to  disorder  ordinary  transactions.  But  any  de- 
preciation, however  small — even  the  liability  to 
depreciation  without  its  reality — is  enough  to 
disorder  exchange  transactions.  They  are  cal- 
culated to  such  an  extremity  of  fineness  that  the 
change  of  a  decimal  may  be  fatal,  and  may  turn 
a  profit  into  a  loss.  Accordingly  London  has 
become  the  sole  great  settling-house  of  exchange 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         33 

transactions  in  Europe,  instead  of  being  formerly 
one  of  two.  And  this  pre-eminence  London  will 
probably  maintain,  for  it  is  a  natural  pre-emi- 
nence. The  number  of  mercantile  bills  drawn  upon 
London  incalculably  surpasses  those  drawn  on  any 
other  European  city  ;  London  is  the  place  which 
receives  more  than  any  other  place,  and  pays 
more  than  any  other  place,  and  therefore  it  is  the 
natural  'clearing  house.'  The  pre-eminence  of 
Paris  partly  arose  from  a  distribution  of  political 
power,  which  is  already  disturbed ;  but  that  oi 
London  depends  on  the  regular  course  of  com- 
merce, which  is  singularly  stable  and  hard  to  change. 
Now  that  London  is  the  clearing-house  to 
foreign  countries,  London  has  a  new  liability  to 
foreign  countries.  At  whatever  place  many  peo- 
ple have  to  make  payments,  at  that  place  those 
people  must  keep  money.  A  large  deposit  of 
foreign  money  in  London  is  now  necessary  for  the 
business  of  the  world.  During  the  immense  pay- 
ments from  France  to  Germany,  the  sum  in  transitu 
— the  sum  in  London — has  perhaps  been  unusually 
large.  But  it  will  ordinarily  be  very  great.  The 
present  political  circumstances  no  doubt  will  soon 
change.  We  shall  soon  hold  in  Lombard  Street  far 
less  of  the  money  of  foreign  governments  ;  but  we 
shall  hold  more  and  more  of  the  money  of  private 


34        A    GENERAL    VIEW  OF  LOMBARD  STREET. 

persons  ;  for  the  deposit  at  a  clearing-house  nec- 
essary to  settle  the  balance  of  commerce  must  tend 
to  increase  as  that  commerce  itself  increases. 

And  this  foreign  deposit  is  evidently  of  a  deli- 
cate and  peculiar  nature.  It  depends  on  the  good 
opinion  of  foreigners,  and  that  opinion  may  di- 
minish or  may  change  into  a  bad  opinion.  After 
the  panic  of  1866,  especially  after  the  suspension 
of  Peel's  Act  (which  many  foreigners  confound 
with  a  suspension  of  cash  payments),  a  large 
amount  of  foreign  money  was  withdrawn  from 
London.  And  we  may  reasonably  presume  that 
in  proportion  as  we  augment  the  deposits  of  cash 
by  foreigners  in  London,  we  augment  both  the 
chances  and  the  disasters  of  a  '  run '  upon  Eng- 
land. 

And  if  that  run  should  happen,  the  bullion  to 
meet  it  must  be  taken  from  the  Bank.  There  is 
no  ether  large  store  in  the  country.  The  great 
exchange  dealers  may  have  a  little  for  their  own 
purposes,  but  they  have  no  store  worth  mention- 
ing in  comparison  with  this.  If  a  foreign  creditor 
is  so  kind  as  to  wait  his  time  and  buy  the  bullion 
as  it  comes  into  the  country,  he  may  be  paid 
without  troubling  the  Bank  or  distressing  the 
money  market.  The  German  Government  has 
recently  been  so  kind ;  it  was  in  no  respect 


A   GENERAL    VIEW  OF  LOMBARD  STREET.         35 

afraid.  But  a  creditor  who  takes  fright  will  not 
wait,  and  if  he  wants  bullion  in  a  hurry  he  must 
come  to  the  Bank  of  England. 

In  consequence  all  our  credit  system  depends 
on  the  Bank  of  England  for  its  security.  On  the 
wisdom  of  the  directors  of  that  one  Joint  Stock 
Company,  it  depends  whether  England  shall  be 
solvent  or  insolvent.  This  may  seem  too  strong, 
but  it  is  not.  All  banks  depend  on  the  Bank  of 
England,  and  all  merchants  depend  on  some 
banker.  If  a  merchant  have  io,ooo/.  at  his 
bankers,  and  wants  to  pay  it  to  some  one  in 
Germany,  he  will  not  be  able  to  pay  it  unless  his 
banker  can  pay  him,  and  the  banker  will  not  be 
able  to  pay  if  the  Bank  of  England  should  be  in 
difficulties  and  cannot  produce  his  '  reserve.' 

The  directors  of  the  Bank  are,  therefore,  in  fact, 
if  not  in  name,  trustees  for  the  public,  to  keep 
a  banking  reserve  on  their  behalf;  and  it  would 
naturally  be  expected  either  that  they  distinctly 
recognized  this  -duty  and  engaged  to  perform  it, 
or  that  their  own  self-interest  was  so  strong  in  the 
matter  that  no  engagement  was  needed.  But  so 
far  from  there  being  a  distinct  undertaking  on  the 
part  of  the  Bank  directors  to  perform  this  duty, 
many  of  them  would  scarcely  acknowledge  it,  and 
some  altogether  deny  it.  Mr.  Hankey,  one  of  the 


3$         A    GENERAL    VIE IV  OF  LOMBARD  STREET. 

most  careful  and  most  experienced  of  them,  says 
in  his  book  on  the  Bank  of  England,  the  best 
account  of  the  practice  and  working  of  the  Bank 
which  anywhere  exists — '  I  do  not  intend  here  tc 
enter  at  any  length  on  the  subject  of  the  general 
management  of  the  Bank,  meaning  the  Banking 
Department,  as  the  principle  upon  which  the 
business  is  conducted  does  not  differ,  as  far  as  I 
am  aware,  from  that  of  any  well-conducted  bank 
in  London.'  But,  as  anyone  can  see  by  the 
published  figures,  the  Banking  Department  of  the 
Bank  of  England  keeps  as  a  great  reserve  in 
bank  notes  and  coin  between  30  and  50  per  cent, 
of  its  liabilities,  and  the  other  banks  only  keep  in 
bank  notes  and  coin  the  bare  minimum  they  need 
to  open  shop  with.  And  such  a  constant  differ- 
ence indicates,  I  conceive,  that  the  two  are  not 
managed  on  the  same  principle. 

The  practice  of  the  Bank  has,  as  we  all  know, 
been  much  and  greatly  improved.  They  do  not 
now  manage  like  the  other  Ba*nks  in  Lombard 
Street.  They  keep  an  altogether  different  kind 
and  quantity  of  reserve  ;  but  though  the  practice 
is  mended  the  theory  is  not.  There  has  never 
been  a  distinct  resolution  passed  by  the  Directors 
of  the  Bank  of  England,  and  communicated  by 
them  to  the  public,  stating  even  in  the  mosf 


^    GENERAL    VIEW  OF  LOMBARD  STREET.         37 

general  manner,  how  much  reserve  they  mean  to 
keep  or  how  much  they  do  not  mean,  or  by  what 
principle  in  this  important  matter  they  will  be 
guided. 

The  position  of  the  Bank  directors  is  indeed 
most  singular.  On  the  one  side  a  great  city 
opinion — a  great  national  opinion,  I  may  say,  for 
the  nation  has  learnt  much  from  many  panics — 
requires  the  directors  to  keep  a  large  reserve. 
The  newspapers,  on  behalf  of  the  nation,  are 
always  warning  the  directors  to  keep  it,  and 
watching  that  they  do  keep  it ;  but,  on  the  other 
hand,  another  less  visible  but  equally  constant 
pressure  pushes  the  directors  in  exactly  the  reverse 
way,  and  inclines  them  to  diminish  the  reserve. 

This  is  the  natural  desire  of  all  directors  to 
make  a  good  dividend  for  their  shareholders. 
The  more  money  lying  idle  the  less,  cczteris 
paribuSy  is  the  dividend  ;  the  less  money  lying 
idle  the  greater  is  the  dividend.  And  at  almost 
every  meeting  of  the  proprietors  of  the  Bank  ol 
England,  there  is  a  conversation  on  this  subject. 
Some  proprietor  says  that  he  does  not  see  why  so 
much  money  is  kept  idle,  and  hints  that  the  divi- 
dend ought  to  be  more. 

Indeed,  it  cannot  be  wondered  at  that  the 
Bank  proprietors  do  not  quite  like  their  positioa 


38         A    GENERAL    VIEW   OF  LCMBARD  STREET. 

Theirs  is  the  oldest  bank  in  the  City,  but  theh 
profits  do  not  increase,  while  those  of  other  banks 
most  rapidly  increase.  In  1844,  the  dividend  on 
the  stock  of  the  Bank  of  England  was  7  per  cent, 
;md  the  price  of  the  stock  itself  212  ;  the  dividend 
now  is  9  per  cent.,  and  the  price  of  the  stock  232. 
But  in  the  same  time  the  shares  of  the  London 
and  Westminster  Bank,  in  spite  of  an  addition  of 
100  per  cent,  to  the  capital,  have  risen  from  27  to 
66,  and  the  dividend  from  6  per  cent,  to  20  per 
cent.  That  the  Bank  proprietors  should  not  like 
to  see  other  companies  getting  richer  than  their 
company  is  only  natural. 

Some  part  of  the  lowness  of  the  Bank  dividend, 
and  of  the  consequent  small  value  of  Bank  stock, 
is  undoubtedly  caused  by  the  magnitude  of  the 
Bank  capital ;  but  much  of  it  is  also  due  to 
the  great  amount  of  unproductive  cash — of  cash 
which  yields  no  interest — that  the  Banking 
Department  of  the  Bank  of  England  keeps  lying 
idle.  If  we  compare  the  London  and  Westminster 
Bank — which,  is  the  first  of  the  joint-stock  banks 
in  the  public  estimation  and  known  to  be  very  cau- 
tiously and  carefully  managed — with  the  Bank  of 
England,  we  shall  see  the  difference  at  once.  The 
London  and  Westminster  has  only  13  per  cent,  of 
its  liabilities  lying  idle.  The  Banking  Department 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         39 

of  the  Bank  of  England  has  over  40  per  cent.  So 
great  a  difference  in  the  management  must  cause, 
and  does  cause,  a  great  difference  in  the  profits. 
Inevitably  the  shareholders  of  the  Bank  of 
1  England  will  dislike  this  great  difference  ;  more 
or  less,  they  will  always  urge  their  directors  to 
diminish  (as  far  as  possible)  the  unproductive 
reserve,  and  to  augment  as  far  as  possible  their 
own  dividend. 

In  most  banks  there  would  be  a  wholesome  dread 
restraining  the  desire  of  the  shareholders  to  reduce 
the  reserve  ;  they  would  fear  to  impair  the  credit 
of  the  bank.  But  fortunately  or  unfortunately,  no 
one  has  any  fear  about  the  Bank  of  England. 
The  English  world  at  least  believes  that  it  will  not, 
almost  that  it  cannot,  fail.  Three  times  since  1844 
the  Banking  Department  has  received  assistance, 
and  would  have  failed  without  it.  In  1825,  the 
entire  concern  almost  suspended  payment ;  in  1 797, 
it  actually  did  so.  But  still  there  is  a  faith  in  the 
Bank,  contrary  to  experience,  and  despising 
evidence.  No  doubt  in  every  one  of  these  years 
die  condition  of  the  Bank,  divided  or  undivided, 
was  in  a  certain  sense  most  sound ;  it  could 
ultimately  have  paid  all  its  creditors  all  it  owed, 
and  returned  to  its  shareholders  all  their  own 
capital.  But  ultimate,  payment  is  not  what  the 


40         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

creditors  of  a  bank  want ;  they  want  present,  not 
postponed,  payment ;  they  want  to  be  repaid 
according  to  agreement ;  the  contract  was  that  they 
should  be  paid  on  demand,  and  if  they  are  not 
paid  on  demand  they  may  be  ruined.  And  that 
instant  payment,  in  the  years  I  speak  of,  the 
Bank  of  England  certainly  could  not  have  made. 
But  no  one  in  London  ever  dreams  of  question- 
ing the  credit  of  the  Bank,  and  the  Bank  never, 
dreams  that  its  own  credit  is  in  danger.  Somehow 
everybody  feels  the  Bank  is  sure  to  come  right. 
In  1797,  when  it  had  scarcely  any  money  left, 
the  Government  said  not  only  that  it  need  not  pay 
away  what  remained,  but  that  it  must  not.  The 
'  effect  of  letters  of  licence '  to  break  Peel's  Act 
has  confirmed  the  popular  conviction  that  the 
Government  is  close  behind  the  Bank,  and  will 
help  it  when  wanted.  Neither  the  Bank  nor  the 
Banking  Department  have  ever  had  an  idea  of 
being  put  '  into  liquidation ; '  most  men  would 
think  as  soon  of  '  winding  up '  the  English  nation. 
Since  then  the  Bank  of  England,  as  a  bank,  is 
exempted  from  the  perpetual  apprehension  that 
makes  other  bankers  keep  a  large  reserve — the 
apprehension  of  discredit — it  would  seem  particu- 
larly necessary  that  its  managers  should  be 
themselves  specially  interested  in  keeping  that 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         41 

reserve,  and  specially  competent  to  keep  it.  But  I 
need  not  say  that  the  Bank  directors  have  not  thdr 
personal  fortune  at  stake  in  the  management  of 
the  Bank.  They  are  rich  City  merchants,  and 
their  stake  in  the  Bank  is  trifling  in  comparison 
with  the  rest  of  their  wealth.  If  the  Bank  were 
wound  up,  most  of  them  would  hardly  in  their 
income  feel  the  difference.  And  Avhat  is  more,  the 
Bank  directors  are  not  trained  bankers  ;  they  were, 
not  bred  to  the  trade,  and  do  not  in  general  give 
the  main  power  of  their  minds  to  it.  They  are 
merchants,  most  of  whose  time  and  most  of  whose 
real  mind  are  occupied  in  making  money  in  their 
own  business  and  for  themselves. 

It  might  be  expected  that  as  this  great  public 
duty  was  cast  upon  the  Banking  Department  of  the 
Bank,  the  principal  statesmen  (if  not  Parliament 
itself)  would  have  enjoined  on  them  to  perform  it. 
But  no  distinct  resolution  of  Parliament  has  ever 
enjoined  it ;  scarcely  any  stray  word  of  any  influ- 
ential statesman.  And,  on  the  contrary,  there  is 
a  whole  catena  of  authorities,  beginning  with  Sir 
Robert  Peel  and  ending  with  Mr.  Lowe,  which 
say  that  the  Banking  Department  of  the  Bank  of 
England  is  only  a  Bank  like  any  other  bank — a 
Company  like  other  companies ;  that  in  this 
capacity  it  has  no  peculiar  position,  and  no  public 


42         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

duties  at  all.  Nine-tenths  of  English  statesmen, 
if  they  were  asked  as  to  the  management  of  the 
Banking  Department  of  the  Bank  of  England, 
would  reply  that  it  was  no  business  of  theirs  or  ol 
Parliament  at  all ;  that  the  Banking  Department 
alone  must  look  to  it. 

The  result  is  that  we  have  placed  the  exclusive 
custody  of  our  entire  banking  reserve  in  the 
hands  of  a  single  board  of  directors  not  particu- 
larly trained  for  the  duty — who  might  be  called 
'  amateurs/ — who  have  no  particular  interest  above 
other  people  in  keeping  it  undiminished — who 
acknowledge  no  obligation  to  keep  it  undi- 
minished— who  have  never  been  told  by  any  great 
statesman  or  public  authority  that  they  are  so 
to  keep  it  or  that  they  have  anything  to  do  with  it — • 
who  are  named  by  and  are  agents  for  a  proprietary 
which  would  have  a  greater  income  if  it  was 
diminished, — who  do  not  fear,  and  who  need  not 
fear,  ruin,  even  if  it  were  all  gone  and  wasted.  -^ 

That  such  an  arrangement  is  strange  must  be 
plain ;  but  its  strangeness  can  only  be  compre- 
hended when  we  know  what  the  custody  of  a 
national  banking  reserve  means,  and  how  delicate 
and  difficult  it  is. 


A   GENERAL    VIEW  OF  LOMBARD  STREET.         43 


II. 


Such  a  i  eserve  as  we  have  s  ten  is  kept  to  meet 
sudden  and  unexpected  demands.  If  the  bankers 
of  a  country  are  asked  for  much  more  than  is 
commonly  wanted,  then  this  reserve  must  be 
resorted  to.  What  then  are  these  extra  de- 
mands ?  and  how  is  this  extra  reserve  to  be 
used?  Speaking  broadly,  these  extra  demands 
are  of  two  kinds — -one  from  abroad  to  meet  for- 
eign payments  requisite  to  pay  large  and  unusual 
foreign  debts,  and  the  other  from  at  home  to  meet 
sudden  apprehension  or  panic  arising  in  any 
manner,  rational  or  irrational. 

No  country  has  ever  been  so  exposed  as 
England  to  a  foreign  demand  on  its  banking 
reserve,  not  only  because  at  present  England  is  a 
large  borrower  from  foreign  nations,  but  also  (and 
much  more)  because  no  nation  has  ever  had  a 
foreign  trade  of  such  magnitude,  in  such  varied 
objects,  or  so  ramified  through  the  world.  The 
ordinary  foreign  trade  of  a  country  requires  no 
cash  ;  the  exports  on  one  side  balance  the  imports 
on  the  other.  But  a  sudden  trade  of  import — 
like  the  import  of  foreign  corn  after  a  bad  harves* 


44         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

—or  (what  is  much  less  common,  though  there 
are  cases  of  it)  the  cessation  of  any  great  export, 
— causes  a  balance  to  become  due,  which  must 
be  paid  in  cash. 

Now,  the  only  source  from  which  large  sums  of 
cash  can  be  withdrawn  in  countries  where  bank- 
ing is  at  all  developed,  is  a  '  bank  reserve/  In 
England  especially,  except  a  few  sums  of  no  very 
considerable  amount  held  by  bullion  dealers  in  the 
course  of  their  business,  there  are  no  sums  worth 
mentioning  in  cash  out  of  the  banks  ;  an  ordinary 
person  could  hardly  pay  a  serious  sum  without 
going  to  some  bank,  even  if  he  spent  a  month  in 
trying.  All  persons  who  wish  to  pay  a  large  sum 
in  cash  trench  of  necessity  on  the  banking 
reserve.  But  then  what  is  '  cash  ?  '  Within  a 
country  the  action  of  a  Government  can  settle  the 
quantity,  and  therefore  the  value,  of  its  currency  ; 
but  outside  its  own  country,  no  Government  can 
do  so.  Bullion  is  the  '  cash  '  of  international 
trade  ;  paper  currencies  are  of  no  use  there,  and 
coins  pass  only  as  they  contain  more  or  less 
bullion. 

When  then  the  legal  tender  of  a  country  is 
purely  metallic,  all  that  is  necessary  is  that  banks 
should  keep  a  sufficient  store  of  that '  legal  tender/ 
But  when  the  '  legal  tendc  r  '  is  partly  metal  and 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         45 

partly  paper,  it  is  necessary  that  the  paper  '  legal 
tender  ' — the  bank  note — should  be  convertible 
into  bullion.  And  here  I  should  pass  my  limits, 
and  enter  on  the  theory  of  Peel's  Act  if  I  began  to 
discuss  the  conditions  of  convertibility.  I  deal 
only  with  the  primary  pre-requisite  of  effectual 
foreign  payments — a  sufficient  supply  of  the  local 
legal  tender  ;  with  the  afterstep — the  change  oi 
the  local  legal  tender  into  the  universally  accepta- 
ble commodity — I  cannot  deal. 

What  I  have  to  deal  with  is,  for  the  present, 
ample  enough.  The  Bank  of  England  must  keep 
a  reserve  of  '  legal  tender'  to  be  used  for  foreign 
payments  if  itself  fit,  and  to  be  used  in  obtaining 
bullion  if  itself  unfit.  And  foreign  payments  are 
sometimes  very  large,  and  often  very  sudden. 
The  '  cotton  drain/  as  it  is  called — the  drain  to  the 
East  to  pay  for  Indian  cotton  during  the  American 
Civil  War — took  many  millions  from  this  country 
for  a  series  of  years.  A  bad  harvest  must  take 
millions  in  a  single  year.  In  order  to  find  such 
great  sums,  the  Bank  of  England  requires  the 
steady  use  of  an  effectual  instrument. 

That  instrument  is  the  elevation  of  the  rate  of 
interest.  If  the  interest  of  money  be  raised,  it  is 
proved  by  experience  that  money  does  come  to 
Lombard  Street,  and  theory  shows  that  it  ought  to 


46         A    GENERAL    VIEW  OF  LOMBARD   STREET. 

come.  To  fully  explain  the  matter  I  must  go  deep 
into  the  theory  of  the  exchanges,  but  the  general 
notion  is  plain  enough.  Loanable  capita],  like 
every  other  commodity,  comes  where  there  is  most 
to  be  made  of  it.  Continental  bankers  and  others 
instantly  send  great  sums  here,  as  soon  as  the 
rate  of  interest  shows  that  it  can  be  done  profita- 
bly. While  English  credit  is  good,  a  rise  of  the 
value  of  money  in  Lombard  Street  immediately  by 
a  banking  operation  brings  money  to  Lombard 
Street.  And  there  is  also  a  slower  mercantile 
operation.  The  rise  in  the  rate  of  discount  acts 
immediately  on  the  trade  of  this  country.  Prices 
fall  here  ;  in  consequence  imports  are  diminished, 
exports  are  increased,  and,  therefore,  there  is 
more  likelihood  of  a  balance  in  bullion  coming  to 
this  country  after  the  rise  in  the  rate  than  there 
was  before. 

Whatever  persons — one  bank  or  many  banks — 
in  any  country  hold  the  banking  reserve  of  that 
country,  ought  at  the  very  beginning  of  an  unfa- 
vourable foreign  exchange  at  once  to  raise  the  rate 
of  interest,  so  as  to  prevent  their  reserve  fron.? 
being  diminished  farther,  and  so  as  to  replenish  it 
by  imports  of  bullion. 

This  duty,  up  to  about  the  year  1860,  the  Bank 
of  England  did  not  perform  at  all,  as  I  shall  sho^v 


A   GENERAL    VIEW  OF  LOMBARD  STREET.         4; 

farther  on.  A  more  miserable  history  can  hardly 
be  found  than  that  of  the  attempts  of  the  Bank — 
if  indeed  they  can  be  called  attempts — to  keep  a 
reserve  and  to  manage  a  foreign  drain  between  the 
year  1819  (when  cash  payments  were  resumed  by 
the  Bank,  and  when  our  modern  Money  Market 
may  be  said  to  begin)  and  the  year  1857.  The 
panic  of  that  year  for  the  first  time  taught  the  Bank 
directors  wisdom,  and  converted  them  to  sound 
principles.  The  present  policy  of  the  Bank  is  an 
infinite  improvement  on  the  policy  before  1857: 
the  two  must  not  be  for  an  instant  confounded  ; 
but  nevertheless,  as  I  shall  hereafter  show,  the 
present  policy  is  now  still  most  defective,  and 
much  discussion  and  much  effort  will  be  wanted 
before  that  policy  becomes  what  it  ought  to  be. 

A  domestic  drain  is  very  different.  Such  a 
drain  arises  from  a  disturbance  of  credit  within 
the  country,  and  the  difficulty  of  dealing  with  it 
is  the  greater,  because  it  is  often  caused,  or  at 
least  often  enhanced,  by  a  foreign  drain.  Times 
without  number  the  public  have  been  alarmed 
mainly  because  they  saw  that  the  Banking  reserve 
was  already  low,  and  that  it  was  daily  getting 
lower.  The  two  maladies — an  external  drain  and 
an  internal — often  attack  the  money  market  at 
once.  What  then  ought  to  be  done  ? 


48         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

In  opposition  to  what  might  be  at  first  sight 
supposed,  the  best  way  for  the  bank  or  banks  who 
have  the  custody  of  the  bank  reserve  to  deal  with 
a  drain  arising  from  internal  discredit,  is  to  lend 
freely.  The  first  instinct  of  everyone  is  the  con- 
trary. There  being  a  large  demand  on  a  fund 
which  you  want  to  preserve,  the  most  obvious 
way  to  preserve  it  is  to  hoard  it — to  get  in  as  much 
as  you  can,  and  to  let  nothing  go  out  which  you 
can  help.  But  every  banker  knows  that  this  is 
not  the  way  to  diminish  discredit.  This  discredit 
means,  '  an  opinion  that  you  have  not  got  any 
money/  and  to  dissipate  that  opinion,  you  must, 
if  possible,  show  that  you  have  money  :  you  must 
employ  it  for  the  public  benefit  in  order  that  the 
public  may  know  that  you~  have  it.  The  time 
for  economy  and  for  accumulation  is  before.  A 
good  banker  will  have  accumulated  in  ordinary 
times  the  reserve  he  is  to  make  use  of  in  extra- 
ordinary times. 

Ordinarily  discredit  does  not  at  first  settle  on 
any  particular  bank,  still  less  does  it  at  first  con- 
centrate itself  on  the  bank  or  banks  holding  the 
principal  cash  reserve.  These  banks  are  almost 
sure  to  be  those  in  best  credit,  or  they  would  not 
-  be  in  that  position,  and,  having  the  reserve,  they 
are  likely  to  look  stronger  and  seem  stronger  than 


A   GENERAL    VIEW  OF  LOMBARD  STREET. 


49 


any  others.  At  first,  incipient  panic  amounts  to  a 
kind  of  vague  conversation  :  Is  A.  B.  as  good  as 
he  used  to  be  ?  Has  not  C.  D.  lost  money  ?  and 
a  thousand  such  questions.  A  hundred  people 
are  talked  about;  and  a  thousand  think, — '  Am  I 
talked  about,  or  am  I  not  ? '  'Is  my  credit  as  good 
as  it  used  to  be,  or  is  it  less  ? '  And  every 
day,  as  a  panic  grows,  this  floating  suspicion 
becomes  both  more  intense  and  more  diffused  ;  it 
attacks  more  persons,  and  attacks  them  all 
more  virulently  than  at  first.  All  men  of  experi- 
ence, therefore,  try  to  '  strengthen  themselves,' 
as  it  is  called,  in  the  early  stage  of  a  panic  ;  they 
borrow  money  while  they  can  ;  they  come  to  their 
banker  and  offer  bills  for  discount,  which  com- 
monly they  would  not  have  offered  for  days  or 
weeks  to  come.  And  if  the  merchant  be  a  reg- 
ular customer,  a  banker  does  not  like  to  refuse, 
because  if  he  does  he  will  be  said,  or  may  be  said, 
to  be  in  want  of  money,  and  so  may  attract  the 
panic  to  himself.  Not  only  merchants  but  all 
persons  under  pecuniary  liabilities — present  or 
imminent— feel  this  wish  to  '  strengthen  them- 
selves/ and  in  proportion  to  those  liabilities. 
Especially  is  this  the  case  with  what  may  be 
called  the  auxiliary  dealers  in  credit.  Under  any 

system  of  banking  there  will  always  group  them- 
8 


5O         *    GENERAL    VILIV  OF  LOMBARD   STREET. 

selves  about  the  main  bank  or  banks  (in  which  is 
kept  the  reserve)  a  crowd  of  smaller  money 
dealers,  who  watch  the  minutiae  of  bills,  look  into 
special  securities  which  busy  bankers  have  not  time 
for,  and  so  gain  a  livelihood.  As  business  grows, 
the  number  of  such  subsidiary  persons  augments. 
The  various  modes  in  which  money  may  be  lent 
have  each  their  peculiarities,  and  persons  who 
devote  themselves  to  one  only  lend  in  that  way 
more  safely,  and  therefore  more  cheaply.  In 
time  of  panic,  these  subordinate  dealers  in  money 
will  always  come  to  the  principal  dealers.  In 
ordinary  times,  the  intercourse  between  the  two  is 
probably  close  enough.  The  little  dealer  is  prob- 
ably in  the  habit  of  pledging  his  '  securities  '  to 
the  larger  dealer  at  a  rate  less  than  he  has  him- 
self charged,  and  of  running  into  the  market  to 
lend  again.  His  time  and  brains  are  his  principal 
capital,  and  he  wants  to  be  always  using  them. 
But  in  times  of  incipient  panic,  the  minor  money 
dealer  always  becomes  alarmed.  His  credit  is 
never  very  established  or  very  wide  ;  he  always 
lears  that  he  may  be  the  person  on  whom  current 
suspicion  will  fasten,  and  often  he  is  so.  Accord- 
ingly he  asks  the  larger  dealer  for  advances.  A 
number  of  such  persons  ask  all  the  large  dealers 
--those  who  have  the. money — the  holders  of  the 


A  GENERAL    VIEW  OF  LOMBARD  STREET.          51 

reserve.  And  then  the  plain  problem  before  the 
great  dealers  comes  to  be — '  How  shall  we  best 
protect  ourselves  ?  No  doubt  the  immediate  ad- 
vance to  these  second-class  dealers  is  annoying, 
but  may  not  the  refusal  of  it  even  be  dangerous  ? 
A  panic  grows  by  what  it  feeds  on  ;  if  it  devours 
these  second-class  men,  shall  we,  the  first-class, 
be  safe  ?  ' 

A  panic,  in  a  word,  is  a  species  of  neuralgia,  and 
according  to  the  rules  of  science  you  must  not 
starve  it.  The  holders  of  the  cash  reserve  must 
be  ready  not  only  to  keep  it  for  their  own  liabilities, 
but  to  advance  it  most  freely  for  the  liabilities  of 
others.  They  must  lend  to  merchants,  to  minor 
bankers,  to  '  this  man  and  that  man/  whenever 
the  security  is  good.  In  wild  periods  of  alarm, 
one  failure  makes  many,  and  the  best  way  to 
prevent  the  derivative  failures  is  to  arrest  the 
primary  failure  which  causes  them.  The  way  in 
which  the  panic  of  1825  was  stopped  by  advancing 
money  has  been  described  in  so  broad  and  graphic 
a  way  that  the  passage  has  become  classical.  '  We 
lent  it,'  said  Mr.  Harman,  on  behalf  of  the  Bank 
of  England,  '  by  every  possible  means  arid  in 
modes  we  had  never  adopted  before  ;  we  took  iu 
stock  on  security,  we  purchased  Exchequer  bills, 
we  made  advances  on  Exchequer  bills,  we  not  only 


52         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

discounted  outright,  but  we  made  advances  on  the 
deposit  of  bills  of  exchange  to  an  immense  amount 
in  short,  by  every  possible  means  consistent  with 
the  safety  of  the  Bank,  and  we  were  not  on  some 
occasions  over-nice.  Seeing  the  dreadful  state  in 
which  the  public  were,  we  rendered  every  assist- 
ance in  our  power.'  After  a  day  or  two  of  this 
treatment,  the  entire  panic  subsided,  and  the 
*  City  '  was  quite  calm. 

The  problem  of  managing  a  panic  must  not  be 
thought  of  as  mainly  a  'banking  '  problem.  It  is 
primarily  a  mercantile  one.  All  merchants  are 
under  liabilities  ;  they  have  bills  to  meet  soon,  and 
they  can  only  pay  those  bills  by  discounting  bills 
on  other  merchants.  In  other  words,  all  merchants 
are  dependent  on  borrowing  money,  and  large  mer- 
chants are  dependent  on  borrowing  much  money. 
At  the  slightest  symptom  of  panic  many  merchants 
want  to  borrow  more  than  usual ;  they  think  they 
will  supply  themselves  with  the  means  of  meeting 
their  bills  while  those  means  are  still  forthcoming. 
If  the  bankers  gratify  the  merchants,  they  must 
lend  largely  just  when  they  like  it  least ;  if  they 
do  not  gratify  them,  there  is  a  panic. 

On  the  surface  there  seems  a  great  inconsistency 
in  all  this.  First,  you  establish  in  some  bank  or 
banks  a  certain  reserve  ;  you  make  of  it  or  them  a 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         ?$ 

kind  of  ultimate  treasury,  where  the  last  shilling 
of  the  country  is  deposited  and  kept.  And  then 
you  go  on  to  say  that  this  final  treasury  is  also  to 
be  the  last  lending-house ;  that  out  of  it  unbounded, 
or  at  any  rate  immense,  advances  are  to  be  made 
when  no  on&e  else  lends.  This  seems  like  saying 
— first,  that  the  reserve  should  be  kept,  and  then 
that  it  should  not  be  kept.  But  there  is  no  puzzle 
in  the  matter.  The  ultimate  banking  reserve  of  a 
country  (by  whomsoever  kept)  is  not  kept  out  of 
show,  but  for  certain  essential  purposes,  and  one  of 
those  purposes  is  the  meeting  a  demand  for  cash 
caused  by  an  alarm  within  the  country.  It  is  not 
unreasonable  that  our  ultimate  treasure  in  particu- 
lar cases  should  be  lent ;  on  the  contrary,  we  keep 
that  treasure  for  the  very  reason  that  in  particular 
cases  it  should  be  lent.  v 

When  reduced  to  abstract  principle,  the  subject 
comes  to  this.  An  '  alarm  '  is  an  opinion  that 
the  money  of  certain  persons  will  not  pay  their 
creditors  when  those  creditors  want  to  be  paid. 
I  f  possible,  that  alarm  is  best  met  by  enabling 
those  persons  to  pay  their  creditors  to  the  very 
moment.  For  this  purpose  only  a  little  money 
is  wanted.  If  that  alarm  is  not  so  met,  it  aggra- 
vates into  a  panic,  which  is  an  opinion  that  most 
people,  or  very  many  people,  will  not  pay  their 


54        A    GENERAL    VIEW  OF  LOMBARD  STREET. 

creditors  ;  and  this  too  can  only  be  met  by  ena« 
bling  all  those  persons  to  pay  what  they  owe, 
which  takes  a  great  deal  of  money,  No  one  has 
enough  money,  or  anything  like  enough,  but  the 
holders  of  the  bank  reserve. 

Not  that  the  help  so  given  by  the  banks  holding 
that  reserve  necessarily  diminishes  it,  Very  com- 
monly the  panic  extends  as  far,  or  almost  as  far, 
as  the  bank  or  banks  which  hold  the  reserve, 
but  does  not  touch  it  or  them  at  all.  In  this 
case  it  is  enough  if  the  dominant  bank  or  banks, 
so  to  speak,  pledge  their  credit  for  those  who 
want  it.  Under  our  present  system  it  is  often 
quite  enough  that  a  merchant  or  a  banker  gets 
the  advance  made  to  him  put  to  his  credit  in  the 
books  of  the  Bank  of  England  ;  he  may  never 
draw  a  cheque  on  it,  or,  if  he  does,  that  cheque 
may  come  in  again  to  the  credit  of  some  other 
customer,  who  lets  it  remain  on  his  account.  An 
increase  of  loans  at  such  times  is  often  an  increase 
of  the  liabilities  of  the  bank,  not  a  diminution  of 
its  reserve.  Just  so  before  1 844,  an  issue  of  notes, 
as  in  1825,  to  quell  a  panic  entirely  internal  did 
not  diminish  the  bullion  reserve.  The  notes  went 
out,  but  they  did  not  return.  They  were  issued 
as  loans  to  the  public,  but  the  public  wanted  nc 
more  ;  they  never  presented  them  for  payment ; 


A    GENERAL    VIEW  OF  LOMBARD   STREET.         55 

they  never  asked  that  sovereigns  should  be  given 
for  them.  But  the  acceptance  of  a  great  liability 
during  an  augmenting  alarm,  though  not  as  bad 
us  an  equal  advance  of  cash,  is  the  thing  next 
worst.  At  any  moment  the  cash  may  be 
demanded.  Supposing  the  panic  to  grow,  it  will 
be  demanded,  and  the  reserve  will  be  lessened 
accordingly. 

No  doubt  all  precautions  may,  in  the  end,  be 
unavailing.  *  On  extraordinary  occasions/  says 
Ricardo,  '  a  general  panic  may  seize  the  country, 
when  every  one  becomes  desirous  of  possessing 
himself  of  the  precious  metals  as  the  most  conveni- 
ent mode  of  realising  or  concealing  his  property, — 
against  such  panic  banks  have  no  security  on  any 
system'  The  bank  or  banks  which  hold  the 
reserve  may  last  a  little  longer  than  the  others  ; 
but  if  apprehension  pass  a  certain  bound,  they 
must  perish  too.  The  use  of  credit  is,  that  it 
enables  debtors  to  use  a  certain  part  of  the  money 
their  creditors  have  lent  them.  If  all  those 
creditors  demand  all  that  money  at  once,  they 
cannot  have  it,  for  that  which  their  debtors  have 
used,  is  for  the  time  employed,  and  not  to  be 
obtained.  With  the  advantages  of  credit  we  must 
take  the  disadvantages  too  ;  but  to  lessen  them  as 
much  as  we  can,  we  must  keep  a  great  store  of 


3  6         A    GENERAL    VIE IV  OF  LOMBARD  STREET. 

,    * 

ready  motfey  always  available,  and  advance  out  oi 
it  very  freely  in  periods  of  panic,  and  in  times  oi 
incipient  alarm. 

The  management  of  the  Money  Market  is  the 
more  difficult,  because,  as  has  been  said,  periods 
of  internal  panic  and  external  demand  for  bullion 
commonly  occur  together.  The  foreign  drain 
empties  the  Bank  till,  and  that  emptiness,  and  the 
resulting  rise  in  the  rate  of  discount,  tend  to 
frighten  the  market.  The  holders  of  the  reserve 
have,  therefore,  to  treat  two  opposite  maladies  at 
once — one  requiring  stringent  remedies,  and 
especially  a  rapid  rise  in  the  rate  of  interest ;  and 
the  other,  an  alleviative  treatment  with  large  and 
ready  loans. 

Before  we  had  much  specific  experience,  it  was 
not  easy  to  prescribe  for  this  compound  disease ; 
but  now  we  know  how  to  deal  with  it.  We  must 
look  first  to  the  foreign  drain,  and  raise  the  rate 
of  interest  as  high  as  may  be  necessary,  Unless 
you  can  stop  the  foreign  export,  you  cannot  allay 
the  domestic  alarm.  The  Bank  will  get  poorer 
and  poorer,  and  its  poverty  will  protract  or  renew 
t  he  apprehension.  And  at  the  rate  of  interest  so 
raised,  the  holders — one  or  more — of  the  final 
Bank  reserve  must  lend  freely.  Very  large  loans 
at  very  high  rates  are  the  best  remedy  for  the 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         57 

worst  malady  of  the  money  market  when  a  foreign 
drain  is  added  to  a  domestic  drain.  Any  notion 
that  money  is  not  to  be  had,  or  that  it  may  not  be 
had  at  any  price,  only  raises  alarm  to  panic  and 
enhances  panic  to  madness.  But  though  the 
rule  is  clear,  the  greatest  delicacy,  the  finest  and 
best  skilled  judgment,  are  needed  to  deal  at  once 
with  such  great  and  contrary  evils. 

And  great  as  is  the  delicacy  of  such  a  problem  in 
all  countries,  it  is  far  greater  in  England  now  than 
it  was  or  is  elsewhere.  The  strain  thrown  by 
a  panic  on  the  final  bank  reserve  is  proportional 
to  the  magnitude  of  a  country's  commerce,  and  to 
the  number  and  size  of  the  dependent  banks — 
banks,  that  is,  holding  no  cash  reserve — that  are 
grouped  around  the  central  bank  or  banks.  And 
in  both  respects  our  system  causes  a  stupendous 
strain.  The  magnitude  of  our  commerce,  and  the 
number  and  magnitude  of  the  banks  which  depend 
on  the  Bank  of  England,  are  undeniable.  There 
are  very  many  more  persons  under  great  liabilities 
than  there  are,  or  ever  were,  anywhere  else.  At 
the  commencement  of  every  panic,  all  persons 
under  such  liabilities  try  to  supply  themselves 
with  the  means  of  meeting  those  liabilities  while 
they  can.  This  causes  a  great  demand  for  new 
loans  And  so  far  from  being  able  to  meet  it,  the 

3* 


^8         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

bankers  who  do  not  keep  an  extra  reserve  at  that 
time  borrow  largely,  or  do  not  renew  large  loans 
—very  likely  do  both. 

London  bankers,  other  than  the  Bank  of 
England,  effect  this  in  several  ways.  First,  they 
have  probably  discounted  bills  to  a  large  amount  for 
the  bill  brokers,  and  if  these  bills  are  paid,  they 
decline  discounting  any  others  to  replace  them. 
The  directors  of  the  London  and  Westminster 
Bank  had,  in  the  panic  of  1857,  discounted  millions 
of  such  bills,  and  they  justly  said  that  if  those 
bills  were  paid  they  would  have  an  amount  of 
cash  far  more  than  sufficient  for  any  demand.* 
But  how  were  those  bills  to  be  paid  ?  Some  one 
else  must  lend  the  money  to  pay  them.  The  mer- 
cantile community  could  not  on  a  sudden  bear  to 
lose  so  large  a  sum  of  borrowed  money ;  they  have 
been  used  to  rely  on  it,  and  they  could  not  carry 
on  their  business  without  it.  Least  of  all  could 
they  bear  it  at  the  beginning  of  a  panic,  when 
everybody  wants  more  money  than  usual.  Speak- 
ing broadly,  those  bills  can  only  be  paid  by  the  dis- 
count of  other  bills.  When  the  bills  (suppose)  of  a 
Manchester  warehouseman  which  he  gave  to  the 
manufacturer  become  due,  he  cannot,  as  a  rule,  pay 
for  them  at  once  in  cash  ;  he  has  bought  on  credit, 

*  See  Note  B.  at  the  end  of  the  volume. 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         59 

and  he  has  sold  on  credit.  He  is  but  a  middle- 
man. To  pay  his  own  bill  to  the  maker  of  the 
goods,  he  must  discount  the  bills  he  has  received 
from  the  shopkeepers  to  whom  he  has  sold  the 
goods  ;  but  if  there  is  a  sudden  cessation  in  the 
means  of  discount,  he  will  not  be  able  to  discount 
them.  All  our  mercantile  community  must  obtain 
new  loans  to  pay  old  debts.  If  some  one  else  did 
not  pour  into  the  market  the  money  wrhich  the 
banks  like  the  London  and  Westminster  Bank 
take  out  of  it,  the  bills  held  by  the  London  and 
Westminster  Bank  could  not  be  paid. 

Who  then  is  to  pour  in  the  new  money  ? 
Certainly  not  the  bill  brokers.  They  have 
been  used  to  re-discount  with  such  banks  as 
the  London  and  Westminster  millions  of  bills, 
and  if  they  see  that  they  are  not  likely  to  be 
able  to  re-discount  those  bills,  they  instantly 
protect  themselves  and  do  not  discount  them. 
Their  business  does  not  allow  them  to  keep  much 
cash  unemployed.  They  give  interest  for  all  the 
money  deposited  with  them — an  interest  often 
nearly  approaching  the  interest  they  can  charge  ; 
as  they  can  only  keep  a  small  reserve  a  panic  tells 
on  them  more  quickly  than  on  anyone  else.  The) 
stop  their  discounts,  or  much  diminish  their  dis- 
counts, immediately.  There  is  no  new  money  to 


(5o         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

be  had  from  them,  and  the  only  place  at  which  they 
can  have  it  is  the  Bank  of  England. 

There  is  even  a  simpler  case :  the  banker  who  is 
uncertain  of  his  credit,  and  wants  to  increase  his 
cash,  may  have  money  on  deposit  at  the  bill 
brokers.  If  he  wants  to  replenish  his  reserve,  he 
may  ask  for  it,  suppose,  just  when  the  alarm  is 
beginning.  But  if  a  great  number  of  persons  do  this 
very  suddenly,  the  bill  brokers  will  not  at  once  be 
able  to  pay  without  borrowing.  They  have  excel- 
lent bills  in  their  case,  but  these  will  not  be  due  for 
some  days  ;  and  the  demand  from  the  more  or  less 
alarmed  bankers  is  for  payment  at  once  and  to-day. 
Accordingly  the  bill  broker  takes  refuge  at  the 
Bank  of  England — the  only  place  where  at  such 
a  moment  new  money  is  to  be  had. 

The  case  is  just  the  same  if  the  banker  wants  to 
sell  Consols,  or  to  call  in  money  lent  on  Consols. 
These  he  reckons  as  part  of  his  reserve.  And  in 
ordinary  times  nothing  can  be  better.  According 
to  the  saying,  you  '  can  sell  Consols  on  a  Sunday.' 
In  a  time  of  no  alarm,  or  in  any  alarm  affecting 
truJ:  particular  banker  only,  he  can  rely  on  such 
reserve  without  misgiving.  But  not  so  in  a 
general  panic.  Then,  if  he  wants  to  sell  5oo,ooo/. 
worth  of  Consols,  he  will  not  find  5OO,ooo/.  of 
fresh  money  ready  to  ^ome  into  the  market.  All 


A   GENERAL    VIEW  OF  LOMBARD   STREET.         £l 

irdinary  bankers  are  wanting  to  sell,  or  thinking 
they  may  have  to  sell.     The  only  resource  is  the  | 
Bank   of  England.     In    a   great   panic,  Consoler 
cannot  be  sold  unless  the  Bank  of  England  will 
advance  to  the  buyer,  and    no  buyer  can  obtain 
advances  on  Consols  at  such   a   time  unless  the 
Bank  of  England  will  lend  to  him. 

The  case  is  worse  if  the  alarm   is  not  confined 
to  the  great   towns,  but   is  diffused   through  the 
country.     As  a  rule,  country  bankers    only  keep  / 
so  much   barren   cash  as    is  necessary  for   their 
common  business.     All  the  rest  they  leave  at  the 
bill   brokers,  or  at  the   interest-giving  banks,  or 
invest  in  Consols  and  such  securities.     But  in  a 
panic  they  come  to  London  and  want  this  money. 
And  it  is  only  from  the  Bank  of  England  that  they  \ 
can  get  it,  for  all  the  rest  of  London  want  their  \ 
money  for  themselves. 

If  we  remember  that  the  liabilities  of  Lombard 
Street  payable  on  demand  are  far  larger  than 
those  of  any  like  market,  and  that  the  liabilities  of 
the  country  are  greater  still,  we  can  conceive  the 
magnitude  of  the  pressure  on  the  Bank  of  Eng- 
land when  both  Lombard  Street  and  the  country 
suddenly  and  at  once  come  upon  it  for  aid.  No 
other  bank  was  ever  exposed  to  a  demand  so 


62         A    GENERAL    VIEW  OF  LOMBARD   STREET. 

formidable,  for  none  ever  before  kept  the  banking 
reserve  for  such  a  nation  as  the  English. 

The  mode  in  which  the  Bank  of  England  meets 
this  great  responsibility  is  very  curious.     It  un- 
questionably does  make  enormous  advances  in 
every  panic- 
In    1847  the  loans   on  '  private  se-  £  £ 

curities '  increased  from  18,963,000     to     20,409,000 
1857  ditto  ditto  20,404,000     to     31,350,000 

1866  ditto  ditto  18,507,000     to     33,447,000 

But,  on  the  other  hand,  as  we  have  seen,  though 
the  Bank,  more  or  less,  does  its  duty,  it  does  not 
distinctly  acknowledge  that  it  is  its  duty.  We  are 
apt  to  be  solemnly  told  that  the  Banking  Depart- 
ment of  the  Bank  of  England  is  only  a  bank  like 
/other  banks — that  it  has  no  peculiar  duty  in  times 
of  panic — that  it  then  is  to  look  to  itself  alone,  as 
other  banks  look.  And  there  is  this  excuse  for 
the  Bank.  Hitherto  questions  of  banking  have 
been  so  little  discussed  in  comparison  with  ques- 
tions of  currency,  that  the  duty  of  the  Bank  in  time 
of  panic  has  been  put  on  a  wrong  ground. 

It  is  imagined  that  because  bank  notes  are  a. 
legal  tender,  the  Bank  has  some  peculiar  duty 
to  help  other  people.  But  bank  notes  are  only 
a  legal  tender  at  the  Issue  Department,  not 
at  the  Banking  Department,  and  the  accidental 


A    GENERAL    VIEW  OF  LOMBARD   STREET.         £3 

combination  of  the  two  departments  in  the  same 
building  gives  the  Banking  Department  no  aid 
in  meeting  a  panic.  If  the  Issue  Department 
were  at  Somerset  House,  and  if  it  issued  Govern- 
ment notes  there,  the  position  of  the  Banking 
Department  under  the  present  law  would  be 
exactly  what  it  is  now.  No  doubt,  formerly  the  • 
Bank  of  England  could  issue  what  it  pleased,  but 
that  historical  reminiscence  makes  it  no  stronger 
now  that  it  can  no  longer  so  issue.  We  must 
deal  with  what  is,  not  with  what  was. 

And  a  still  worse  argument  is  also  used.  It  is 
r.aid  that  because  the  Bank  of  England  keeps  the 
'  State  account '  and  is  the  Government  banker,  it 
is  a  sort  of  '  public  institution  '  and  ought  to  help 
everybody.  But  the  custody  of  the  taxes  which 
have  been  collected  and  which  wait  to  be  expended 
is  a  duty  quite  apart  from  panics.  The  Govern- 
ment money  may  chance  to  be  much  or  little  when 
the  panic  comes.  There  is  no  relation  or  connec- 
tion between  the  two.  And  the  State,  in  getting 
ihe  Bank  to  keep  what  money  it  may  chance  to 
have,  or  in  borrowing  of  it  what  money  it  may 
chance  to  want,  does  not  hire  it  to  stop  a  panic  or 
much  help  it  if  it  tries. 

The  real  reason  has  not  been  distinctly  seen. 
As  has  been  already  said  —but  on  account  of  its 


64         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

importance  and  perhaps  its  novelty  it  is  worth 
saying  again — whatever  bank  or  banks  keep  the 
ultimate  banking  reserve  of  the  country  must  lend 
that  reserve  most  freely  in  time  of  apprehension, 
for  that  is  one  of  the  characteristic  uses  of  the  bank 
reserve,  and  the  mode  in  which  it  attains  one  of 
the  main  ends  for  which  it  is  kept.  Whether 
rightly  or  wrongly,  at  present  and  in  fact  the  Bank 
of  England  keeps  our  ultimate  bank  reserve,  and 
therefore  it  must  use  it  in  this  manner. 

And  though  the  Bank  of  England  certainly  do 
make  great  advances  in  time  of  panic,  yet  as  they 
\  do  not  do  so  on  any  distinct  principle,  they  natu- 
/  rally  do  it  hesitatingly,  reluctantly,  and  with  mis- 
'  giving.  In  1847,  even  in  1866 — the  latest  panic, 
and  the  one  in  which  on  the  whole  the  Bank- 
acted  the  best — there  was  nevertheless  an  instant 
when  it  was  believed  the  Bank  would  not  advance 
on  Consols,  or  at  least  hesitated  to  advance  on 
them.  The  moment  this  was  reported  in  the 
City  and  telegraphed  to  the  country,  it  made  the 
panic  indefinitely  worse.  In  fact,  to  make  large 
advances  in  this  faltering  way  is  to  incur  the  evil 
of  making  them  without  obtaining  the  advantage. 
What  is  wanted  and  what  is  necessary  to  stop  a 
panic  is  to  diffuse  the  impression,  that  though 
money  may  be  dear,  still  money  is  to  be  had. 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         65 

If  people  could  be  really  convinced  that  they 
eould  have  money  if  they  wait  a  day  or  two,  and 
that  utter  ruin  is  not  coming,  most  likely  they 
would  cease  to  run  in  such  a  mad  way  for  money. 
Either  shut  the  Bank  at  once,  and  say  it  will  not 
lend  more  than  it  commonly  lends,  or  lend  freely, 
boldly,  and  so  that  the  public  may  feel  you  mean 
to  go  on  lending.  To  lend  a  great  deal,  and  yet 
not  give  the  public  confidence  that  you  will  lend 
sufficiently  and  effectually,  is  the  wrorst  of  all  pol- 
icies ;  but  it  is  the  policy  now  pursued. 

In  truth,  the  Bank  dotjnot  lend  from  the 
motives  which  should  make  a  bank  lend.  The 
holders  of  the  Bank  reserve  ought  to  lend  at  once 
and  most  freely  in  an  incipient  panic,  because 
they  fear  destruction  in  the  panic.  They  ought 
not  to  do  it  to  serve  others  ;  they  ought  to  do  it 
to  serve  themselves.  They  ought  to  know  that 
this  bold  policy  is  the  only  safe  one,  and  for  that 
reason  they  ought  to  choose  it.  But  the  Bank 
directors  are  not  afraid.  Even  at  the  last  moment 
they  say  that  '  whatever  happens  to  the  commu- 
nity, they  can  preserve  themselves.'  Both  in  1847 
and  1857  (I  believe  also  in  1866,  though  there  is 
no  printed  evidence  of  it)  the  Bank  directors  con- 
tended that  the  Banking  Department  was  quite 
safe  though  its  reserve  was  nearly  all  gone,  and 


66         A    GENERAL    VIE  IV  OF  LOMBARD  STREET. 

that  it  could  strengthen  itself  by  selling  securi- 
ties and  by  refusing  to  discount.  But  this  is  a 
complete  dream.  The  Bank  of  England  could 
not  sell  '  securities/  for  in  an  extreme  panic  there 
is  no  one  else  to  buy  securities.  The  Bank  can- 
not stay  still  and  wait  till  its  bills  are  paid,  and 
so  fill  its  coffers,  for  unless  it  discounts  equiva- 
lent bills,  the  bills  which  it  has  already  discounted 
will  not  be  paid.  When  the  reserve  in  the  ulti- 
mate bank  or  banks — those  keeping  the  reserve 
--runs  low,  it  cannot  be  augmented  by  the  same 
means  that  other  and  dependent  banks  commonly 
adopt  to  maintain  their  reserve,  for  the  dependent 
banks  trust  that  at  such  moments  the  ultimate 
banks  will  be  discounting  more  than  usual  and 
lending  more  than  usual.  But  ultimate  banks 
have  no  similar  rear-guard  to  rely  upon. 

I  shall  have  failed  in  my  purpose  if  I  have  not 
proved  that  the  system  of  entrusting  all  our 
reserve  to  a  single  board,  like  that  of  the  Bank 
directors,  is  very  anomalous;  that  it  is  very  dan- 
gerous ;  that  its  bad  consequences,  though  much 
felt,  have  not  been  fully  seen  ;  that  they  have  been 
obscured  by  traditional  arguments  and  hidden  in 
the  dust  of  ancient  controversies. 

But  it  will  be  said— What  would  be  better? 
What  other  system  could  there  be  *  We  are  so 


A    GENERAL    VIEW  OF  LOMBAkD   STREET.         fy 

accustomed  to  a  system  of  banking,  dependent 
for  its  cardinal  function  on  a  single  bank,  that 
we  can  hardly  conceive  of  any  other.  But  the' 
natural  system — that  which  would  have  sprung 
up  if  Government  had  let  banking  alone — is  that 
of  many  banks  of  equal  or  not  altogether  unequal 
size.  In  all  other  trades  competition  brings  the 
traders  to  a  rough  approximate  equality.  In 
cotton  spinning,  no  single  firm  far  and  perma- 
nently outstrips  the  others.  There  is  no  tendency 
to  a  monarchy  in  the  cotton  world  ;  nor,  where 
banking  has  been  left  free,  is  there  any  tendency  to 
a  monarchy  in  banking  either.  In  Manchester,  in 
Liverpool,  and  all  through  England,  we  have  a 
great  number  of  banks,  each  with  a  business  more 
or  less  good,  but  we  have  no  single  bank  with 
any  sort  of  predominance ;  nor  is  there  any  such 
bank  in  Scotland.  In  the  new  world  of  Joint 
Stock  Banks  outside  the  Bank  of  England,  we  see 
much  the  same  phenomenon.  One  or  more  get 
for  a  time  a  better  business  than  the  others,  but 
no  single  bank  permanently  obtains  an  unques- 
tioned predominance.  None  of  them  gets  so 
much  before  the  others  that  the  others  voluntarily 
place  their  reserves  in  its  keeping.  A  republic 
with  many  competitors  of  a  size  or  sizes  suitable 
to  the  business,  is  the  constitution  of  every  trade 


38         -1   GENERAL    VIEW  OF  LOMBARD   STREET. 

if  left  to  itself,  and  of  banking  as  much  as  any 
other.  A  monarchy  in  any  trade  is  a  sign  oi 
some  anomalous  advantage,  and  of  some  inter- 
vention from  without. 

I  shall  be  at  once  asked — Do  you  propose  a 
revolution  ?  Do  you  propose  to  abandon  the  one- 
reserve  system,  and  create  anew  a  many-reserve 
system?  My  plain  answer  is  that  I  do  not 
propose  it.  I  know  it  would  be  childish.  Credit 
in  business  is  like  loyalty  in  Government.  You 
must  take  what  you  can  find  of  it,  and  work  with 
it  if  possible.  A  theorist  may  easily  map  out  a 
scheme  of  Government  in  which  Queen  Victoria 
could  be  dispensed  with.  He  may  make  a  theory 
that,  since  we  admit  and  we  know  that  the  House 
of  Commons  is  the  real  sovereign,  any  other  sover- 
eign is  superfluous  ;  but  for  practical  purposes, 
it  is  not  even  worth  while  to  examine  these  argu- 
ments. Queen  Victoria  is  loyally  obeyed — without 
doubt,  and  without  reasoning — by  millions  of 
human  beings.  If  those  millions  began  to  argue,  it 
would  not  be  easy  to  persuade  them  to  obey  Queen 
Victoria,  or  anything  else.  Effectual  arguments 
tc  convince  the  people  who  need  convincing  are 
wanting.  Just  so,  an  immense  system  of  credit, 
founded  on  the  Bank  of  England  as  its  pivot  and 
its  basis,  now  exists.  The  English  people,  and 


A    GENERAL    VIEW  JF  LOMBARD  STREET.         69 

foreigners  too,  trust  it  implicitly.  Every  banker 
knows  that  if  he  has  to  prove  that  he  is  worthy  of 
credit,  however  good  may  be  his  arguments,  in  fact 
his  credit  is  gone  :  but  what  we  have  requires  no 
proof.  The  whole  rests  on  an  instinctive  confidence 
generated  by  use  and  years.  Nothing  would 
persuade  the  English  people  to  abolish  the  Bank 
of  England  ;  and  if  some  calamity  swept  it  away, 
generations  must  elapse  before  at  all  the  same 
trust  would  be  placed  in  any  other  equivalent. 

,  A  many-reserve  system,  if  some  miracle  should 
put  it  down  in  Lombard  Street,  would  seem  mon- 
strous there.  Nobody  would  understand  it,  or 
confide  in  it.  Credit  is  a  power  which  may  grow, 
but  cannot  be  constructed.  Those  who  live 
under  a  great  and  firm  system  of  credit  must 
consider  that  if  they  break  up  that  one  they  will 
never  see  another,  for  it  will  take  years  upon 
years  to  make  a  successor  to  it. 

On   this   account,    I    do    not  suggest  that  we 

k  should  return  to  a  natural  or  many-reserve  system 
of  banking.  I  should  only  incur  useless  ridicule 
if  I  did  suggest  it.  Nor  can  I  propose  that  we 
should  adopt  the  simple  and  straightforward 
expedient  by  which  the  French  have  extricated 
themselves  from  the  same  difficulty.  In  France 

i  all   banking  rests  on  the    Bank  of  France,  even 


7Q         A.    GENERAL    VIEW  OF  LOMBARD  STREET. 

more  than  in  England  all  rests  on  the  Bank  oi 
I  England.  The  Bank  of  France  keeps  the  final 
banking  reserve,  and  it  keeps  the  currency  reserve 
too.  But  the  State  does  not  trust  such  a  function 
to  a  board  of  merchants,  named  by  shareholders 
•  The  nation  itself — the  Executive  Government— 
names  the  governor  and  deputy-governor  of  the 
(•Bank  of  France.  These  officers  have,  indeed, 
beside  them  a  council  of  '  regents,'  or  directors, 
named  by  the  shareholders.  But  they  need  not 
attend  to  that  council  unless  they  think  fit ;  they  are 
appointed  to  watch  over  the  national  interest,  and, 
in  so  doing,  they  may  disregard  the  murmurs  of 
the  '  regents '  if  they  like.  And  in  theory,  there  is 
much  to  be  said  for  this  plan.  The  keeping  the 
single  banking  reserve  being  a  national  function, 
it  is  at  least  plausible  to  argue  that  Government 
should  choose  the  functionaries:.  No  doubt  such 
a  political  intervention  is  contrary  to  the  sound 
economical  doctrine  that  '  banking  is  a  trade,  and 
only  a  trade/  But  Government  forgot  that 
doctrine  when,  by  privileges  and  monopolies,  it 
made  a  single  bank  predominant  over  all  others, 
and  established  the  one-reserve  system.  As  that 
system  exists,  a  logical  Frenchman  consistently 
enough  argues  that  the  State  should  watch  and 
manage  it.  But  no  such  plan  would  answer  in 


A    GENERAL    VIEW  OF  LOMBARD   STREET.          j\ 

England.  We  have  not  been  trained  to  care  for 
logical  sequence  in  our  institutions,  or  rather  we 
have  been  trained  not  to  care  for  it.  And  the 
practical  result  for  which  we  do  care  would  in  thi? 
case  be  bad.  The  governor  of  the  Bank  woulc 
be  a  high  Parliamentary  official,  perhaps  in  the 
Cabinet,  and  would  change  as  chance  majorities 
and  the  strength  of  parties  decide.  A  trade 
peculiarly  requiring  consistency  and  special  attain- 
ment would  be  managed  by  a  shifting  and  un- 
trained ruler.  In  fact,  the  whole  plan  would  seem 
to  an  Englishman  of  business  palpably  absurd  ; 
he  would  not  consider  it,  he  would  not  think  it 
worth  considering.  That  it  works  fairly  well  in 
France,  and  that  there  are  specious  arguments  of 
theory  for  it,  would  not  be  sufficient  to  his  mind. 

All  such  changes  being  out  of  the  question,  I 
can  propose  only  three  remedies. 

First.  There  should  be  a  clear  understanding 
between  the  Bank  and  the  public  that,  since  the 
)3ank  hold  our  ultimate  banking  reserve,  they  will 
recognise  and  act  on  the  obligations  which  this 
implies ; — that  they  will  replenish  it  in  times  of 
foreign  demand  as  fully,  and  lend  it  in  times  o( 
internal  panic  as  freely  and  readily,  as  plain  prin- 
ciples of  banking  require. 

This  looks  very  different  from  the  French  plan, 


72         A    GENERAL    VIEW  OF  LOMBARD    STREET. 

but  it  is  not  so  different  in  reality.  In  England  we 
can  often  effect,  by  the  indirect  compulsion  ol 
opinion,  what  other  countries  must  effect  by  the 
direct  compulsion  of  Government.  We  can  do  so 
in  this  case.  The  Bank  directors  now  fear  public 
opinion  exceedingly  ;  probably  no  kind  of  persons 
are  so  sensitive  to  newspaper  criticism.  And  this 
is  very  natural.  Our  statesmen,  it  is  true, 
are  much  more  blamed,  but  they  have  generally 
served  a  long  apprenticeship  to  sharp  criticism. 
If  they  still  care  for  it  (and  some  do  after  years  of 
experience  much  more  than  the  world  thinks), 
they  care  less  for  it  than  at  first,  and  have  come  to 
regard  it  as  an  unavoidable  and  incessant  irritant, 
of  which  they  shall  never  be  rid.  But  a  bank 
director  undergoes  no  similar  training  and  harden- 
ing. His  functions  at  the  Bank  fill  a  very  small  part 
of  his  time  ;  all  the  rest  of  his  life  (unless  he  be  in 
Parliament)  is  spent  in  retired  and  mercantile 
industry.  He  is  not  subjected  to  keen  and 
public  criticism,  and  is  not  taught  to  bear  it. 
Especially  when  once  in  his  life  he  becomes,  by 
rotation,  governor,  he  is  most  anxious  that  the 
two  years  of  office  shall  '  go  off  well.'  He  is  apt 
to  be  irritated  even  by  objections  to  the  prin- 
ciples on  which  he  acts;  and  cannot  bear  with 
equanimity  censure  which  is  pointed  and  personal 


A    GENERAL    VIEW  OF  LOMBARD  STREET.         73 

At  present  I  am  not  sure  if  this  sensitive- 
ness is  beneficial.  \As  the  exact  position  of  the 
Bank  of  England  in  the  Money  Market  is 
indistinctly  seen,  there  is  no  standard  to  which  a 
Bank  governor  can  appeal.  He  is  always  in  feai 
that  *  something  may  be  said  ;  '  but  not  quit* 
knowing  on  what  side  that  'something'  may  be, 
his  fear  is  but  an  indifferent  guide  to  him.  But  II 
the  cardinal  doctrine  were  accepted,  if  it  were 
acknowledged  that  the  Bank  is  charged  with  the 
custody  of  our  sole  banking  reserve,  and  is 
bound  to  deal  with  it  according  to  admitted 
principles,  then  a  governor  of  the  Bank  could  look 
to  those  principles.  He  would  know  which  way 
criticism  was  coming.  If  he  was  guided  by  the 
code,  he  would  have  a  plain  defence.  And  then 
we  may  be  sure  that  old  men  of  business  would 
not  deviate  from  the  code.  At  present  the 
Board  of  Directors  are  a  sort  of  semi-trustees  for 
the  nation.  I  would  have  them  rea)  trustees, 
and  with  a  good  trust  deed. 

Secondly.  The  government  of  the  Bank  should 
be  improved  in  a  manner  to  be  explained.  We 
should  diminish  the  '  amateur '  element ;  we 
should  augment  the  trained  banking  element ;  and 
we  should  ensure  more  constancy  in  the  adminis- 
tration. 

4 


74         A    GENERAL    VIEW  OF  LOMBARD  STREET. 

Thirdly.  As  these  two  suggestions  are  designed 
to  make  the  Bank  as  strong  as  possible,  we  should 
look  at  the  rest  of  our  banking  system,  and  try 
to  reduce  the  demands  on  the  Bank  as  much  as 
we  can.  The  central  machinery  being  inevitably 
frail,  we  should  carefully  and  as  much  as  possible 
diminish  the  strain  upon  it. 

But  to  explain  these  proposals,  and  to  gain  a 
full  understanding  of  many  arguments  that  have 
been  used,  we  must  look  more  in  detail  at  the 
component  parts  of  Lombard  street,  and  at  the 
curious  set  of  causes  which  have  made  it  assume 
its  present  singular  structure. 


CHAPTER    III. 

HOW    LOMBARD    STREET    CAME   TO    EXIST,    AND   WHY 
IT   ASSUMED    ITS    PRESENT    FORM. 

IN  the  last  century,  a  favourite  subject  of  literary 
ingenuity  was  '  conjectural  history/  as  it  was  then 
called.  Upon  grounds  of  probability  a  fictitious 
sketch  was  made  of  the  possible  origin  of  things 
existing.  If  this  kind  of  speculation  were  now 
applied  to  banking,  the  natural  and  first  idea  would 
be  that  large  systems  of  deposit  banking  grew  up 
in  the  early  world,  just  as  they  grow  up  now  in 
any  large  English  colony.  As  soon  as  any  such 
community  becomes  rich  enough  to  have  much 
money,  and  compact  enough  to  be  able  to  lodge 
its  money  in  single  banks,  it  at  once  begins  so  to 
do,  English  colonists  do  not  like  the  risk  of 
keeping  their  money,  and  they  wish  to  make  an 
interest  on  it.  They  carry  from  home  the  idea 
and  the  habit  of  banking,  and  they  take  to  it  as 
soon  as  they  can  in  their  new  world.  Conjectural 


76  HOW  LOMBARD  STREET  CAME    TO  EXIST,  AND 

history  would  be  inclined  to  say  that  all  banking 
began  thus  :  but  such  history  is  rarely  of  any  value. 
The  basis  of  it  is  false.  It  assumes  that  what 
works  most  easily  when  established  is  that  which 
it  would  be  the  most  easy  to  establish,  and  that 
what  seems  simplest  when  familiar  would  be  most 
easily  appreciated  by  the  mind  though  unfa- 
miliar. But  exactly  the  contrary  is  true.  Many 
things  which  seem  simple  and  which  work  well 
when  firmly  established,  are  very  hard  to  establish 
among  new  people,  and  not  very  easy  to  explain 
to  them.  Deposit  banking  is  of  this  sort.  Its 
essence  is  that  a  very  large  number  of  persons 
agree  to  trust  a  very  few  persons,  or  some  one 
person.  Banking  would  not  be  a  profitable  trade 
if  bankers  were  not  a  small  number,  and  deposi- 
tors in  comparison  an  immense  number.  But  to 
get  a  great  number  of  persons  to  do  exactly  the 
same  thing  is  always  very  difficult,  and  nothing 
but  a  very  palpable  necessity  will  make  them 
on  a  sudden  begin  to  do  it.  And  there  is 
no  such  palpable  necessity  in  banking.  If  you 
take  a  country  town  in  France,  even  now,  you 
will  not  find  any  such  system  of  banking  as  ours. 
Cheque-books  are  unknown,  and  money  kept  on 
running  account  by  bankers  is  rare.  People  store 
*heir  money  in  a  caisse  at  their  houses.  Steady 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  77 

savings,  which  are  waiting  for  investment,  and 
which  are  sure  not  to  be  soon  wanted,  may  be 
lodged  with  bankers  ;  but  the  common  floating 
cash  of  the  community  is  kept  by  the  commu- 
nity themselves  at  home.  They  prefer  to  keep 
it  so,  and  it  would  not  answer  a  banker's  purpose 
to  make  expensive  arrangements  for  keeping  it 
otherwise.  If  a  '  branch,'  such  as  the  National 
Provincial  Bank  opens  in  an  English  country 
town,  were  opened  in  a  corresponding  French 
one,  it  would  not  pay  its  expenses.  You  could 
not  get  any  sufficient  number  of  Frenchmen  to 
agree  to  put  their  money  there.  And  so  it  is 
in  all  countries  not  of  British  descent,  though 
in  various  degrees.  Deposit  banking  is  a  ver) 
difficult  thing  to  begin,  because  people  do  not 
like  to  let  their  money  out  of  their  sight,  espe- 
cially do  not  like  to  let  it  out  of  sight  without 
security — still  more,  cannot  all  at  once  agree  on 
any  single  person  to  whom  they  are  content  to 
trust  it  unseen  and  unsecured.  Hypothetical 
history,  which  explains  the  past  by  what  is 
simplest  and  commonest  in  the  present,  is  in 
banking,  as  in  most  things,  quite  untrue. 

The  real  history  is  very  different.  New  wants 
are  mostly  supplied  by  adaptation,  not  by  creation 
or  foundation.  Something  having  been  created 


73   HOW  LOMBARD  STREET  CAME    TO  EXIST,  AND 


to  satisfy  an  extreme  want,  it  is  used  to  satisfy 
less  pressing  wants,  or  to  supply  additional  con* 
veniences.  On  this  account,  political  Government 
— the  oldest  institution  in  the  world — has  been  the 
hardest  worked.  At  the  beginning  of  history,  we 
find  it  doing  everything  which  society  wants  done, 
and  forbidding  everything  which  society  does  not 
wish  done.  In  trade,  at  present,  the  first  com- 
merce in  a  new  place  is  a  general  shop,  which, 
beginning  with  articles  of  real  necessity,  comes 
shortly  to  supply  the  oddest  accumulation  of  petty 
comforts.  And  the  history  of  banking  has  been 
the  same.  The  first  banks  were  not  founded  for 
our  system  of  deposit  banking,  or  for  anything  like 
it.  They  were  founded  for  much  more  pressing 
reasons,  and  having  been  founded,  they,  or  copies 
from  them,  were  applied  to  our  modern  uses. 

The  earliest  banks  of  Italy,  where  the  name 
began,  were  finance  companies.  The  Bank  of  St. 
George,  at  -Genoa,  and  other  banks  founded  in 
imitation  of  it,  were  at  first  only  companies  to  make 
loans  to,  and  float  loans  for,  the  Governments  ol 
the  cities  in  which  they  were  formed.  The  want  oi 
money  is  an  urgent  want  of  Governments  at  most 
periods,  and  seldom  more  urgent  than  it  was  in  the 
tumultuous  Italian  Republics  of  the  Middle  Ages. 
After  these  banks  had  been  long  established, 


WHY  IT  ASSUMED   ITS  PRESENT  FORM.  79 

they  began  to  do  what  we  call  banking  ousiness ; 
but  at  first  they  never  thought  of  it.  The  great 
banks  of  the  North  of  Europe  had  their  origin  ip 
a  want  still  more  curious.  The  notion  of  its 
being  a  prime  business  of  a  bank  to  give  good 
coin  has  passed  out  of  men's  memories ;  but 
wherever  it  is  felt,  there  is  no  want  of  business 
more  keen  and  urgent.  Adam  Smith  describes 
it  so  admirably  that  it  would  be  stupid  not  to 
quote  his  words: — 'The  currency  of  a  great 
state,  such  as  France  or  England,  generally 
consists  almost  entirely  of  its  own  coin.  Should 
this  currency,  therefore,  be  at  any  time  worn, 
dipt,  or  otherwise  degraded  below  its  standard 
value,  the  state  by  a  reformation  of  its  coin 
can  effectually  re-establish  its  currency.  But 
the  currency  of  a  small  state,  such  as  Genoa  or 
Hamburgh,  can  seldom  consist  altogether  in  its 
own  coin,  but  must  be  made  up,  in  a  great  measure, 
of  the  coins  of  all  the  neighbouring  states  with 
which  its  inhabitants  have  a  continual  intercourse. 
Such  a  state,  therefore,  by  reforming  its  coin,  will 
not  always  be  able  to  reform  its  currency.  If 
foreign  bills  of  exchange  are  paid  in  this  currency, 
the  uncertain  value  of  any  sum,  of  what  is  in  its 
own  nature  so  uncertain,  must  render  the  exchange 
always  very  much  against  such  a  state,  its  cur- 


gO  HOW  LOMBARD  STREET  CAME    TO   EXIST,  AND 

rency  being",  in  all  foreign  states,  necessarily  val* 
ued  even  below  what  it  is  worth. 

'  In  order  to  remedy  the  inconvenience  to  which 
this  disadvantageous  exchange  must  have  sub- 
jected their  merchants,  such  small  states,  when 
they  began  to  attend  to  the  interest  of  trade,  have 
frequently  enacted,  that  foreign  bills  of  exchange 
of  a  certain  value  should  be  paid,  not  in  common 
currency,  but  by  an  order  upon,  or  by  a  transfer 
in,  the  books  of  a  certain  bank,  established  upon 
the  credit,  and  under  the  protection  of  the  state, 
this  bank  being  always  obliged  to  pay,  in  good 
and  true  money,  exactly  according  to  the  standard 
of  th£  state.  The  banks  of  Venice,  Genoa, 
Amsterdam,  Hamburgh  and  Nuremburg,  seem  to 
have  been  all  originally  established  with  this  view, 
though  some  of  them  may  have  afterwards  been 
made  subservient  to  other  purposes.  The  money 
of  such  banks,  being  better  than  the  common  cur- 
rency of  the  country,  necessarily  bore  an  agio, 
which  was  greater  or  smaller,  according  as  the 
currency  was  supposed  to  be  more  or  less  degraded 
below  the  standard  of  the  state.  The  agio  of  the 
bank  of  Hamburgh,  for  exa'mple,  which  is  said  to 
be  commonly  about  fourteen  per  cent.,  is  the  sup- 
posed difference  between  the  good  standard  money 
of  the  state,  and  the  dipt,  worn,  and  diminished 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  gj 

currency  poured  into  it  from  all  the  neighbouring 
states. 

'Before  1609  the  great  quantity  of  dipt  and  worn 
foreign  coin,  which  the  extensive  trade  of  Am- 
sterdam brought  from  all  parts. of  Europe,  reduced 
the  value  of  its  currency  about  9  per  cent, 
below  that  of  good  money  fresh  from  the  mint. 
Such  money  no  sooner  appeared  than  it  was 
melted  down  or  carried  away,  as  it  always  is  in 
such  circumstances.  The  merchants,  with  plenty 
of  currency,  could  not  always  find  a  sufficient 
quantity  of  good  money  to  pay  their  bills  of 
exchange  ;  and  the  value  of  those  bills,  in  spite  of 
several  regulations  which  were  made  to  prevent 
it,  became  in  a  great  measure  uncertain. 

'  In  order  to  remedy  these  inconveniences,  a  bank 
was  established  in  1609  under  the  guarantee  of  the 
City.  This  bank  received  both  foreign  coin,  and 
the  light  and  worn  coin  of  the  country  at  its  real 
intrinsic  value  in  the  good  standard  money  of  the 
country,  deducting  only  so  much  as  was  necessary 
for  defraying  the  expense  of  coinage,  and  the 
other  necessary  expense  of  management.  For 
the  value  which  remained,  after  this  small  deduc- 
tion was  made,  it  gave  a  credit  in  its  books. 
This  credit  was  called  bank  money,  which,  as  it 
represented  money  exactly  according  to  the 


$2    HOW  LOMBARD  STREET  CAME    TO  EXIST,  AND 

standard  of  the  mint,  was  always  of  the  same  real 
value,  and  intrinsically  worth  more  than  current 
money.  It  was  at  the  same  time  enacted,  that 
all  bills  drawn  upon  or  negotiated  at  Amsterdam 
of  the  value  of  six  hundred  guilders  and  upwards 
should  be  paid  in  bank  money,  which  at  once  took 
away  all  uncertainty  in  the  value  of  those  bills. 
Every  merchant,  in  consequence  of  this  regulation, 
was  obliged  to  keep  an  account  with  the  bank  in 
order  to  pay  his  foreign  bills  of  exchange,  which 
necessarily  occasioned  a  certain  demand  for  bank 
money.'  * 

Again,  a  most  important  function  of  early 
banks  is  one  which  the  present  banks  retain, 
though  it  is  subsidiary  to  their  main  use ; 
viz.  the  function  of  remitting  money.  A  man 
brings  money  to  the  bank  to  meet  a  pay- 
ment which  he  desires  to  make  at  a  great  dis- 
tance, and  the  bank,  having  a  connection  with 
other  banks,  sends  it  where  it  is  wanted.  As 
soon  as  bills  of  exchange  are  given  upon  a  large 
scale,  this  remittance  is  a  very  pressing  require- 
ment. Such  bills  must  be  made  payable  at  a  place 
convenient  to  the  seller  of  the  goods  in  payment 

*  Smith's '  Wealth  of  Nations,'  Book  IV.  chap.  iii.     '  Digres.*iofl 
concerning  l»anks  of  Deposit,'  £c. 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  g^ 

of  which  they  are  given,  perhaps  at  the  great  town 
where  his  warehouse  is.  But  this  may  be  very 
far  from  the  retail  shop  of  the  buyer  who  bought 
those  goods  to  sell  them  again  in  the  country. 
For  these,  and  a  multitude  of  purposes,  the  instant 
and  regular  remittance  of  money  is  an  early  neces- 
sity of  growing  trade  ;  and  that  remittance  it  war 
a  first  object  of  early  banks  to  accomplish. 

These  are  all  uses  other  than  those  of  deposit 
banking  which  banks  supplied  that  afterwards 
became  in  our  English  sense  deposit  banks.  By 
supplying  these  uses,  they  gained  the  credit  that 
afterwards  enabled  them  to  gain  a  living  as  deposit 
banks.  Being  trusted  for  one  purpose,  they  came 
to  be  trusted  for  a  purpose  quite  different,  ulti- 
mately far  more  important,  though  at  first  less 
keenly  pressing.  But  these  wants  only  affect  a  few 
persons,  and  therefore  bring  the  bank  under  the 
notice  of  a  few  only.  The  real  introductory  func-. 
tion  which  deposit  banks  at  first  perform  is  much 
more  popular,  and  it  is  only  when  they  can  per- 
form this  more  popular  kind  of  business  that  de- 
posit banking  ever  spreads  quickly  and  extensively. 
This  function  is  the  supply  of  the  paper  circula- 
tion to  the  country,  and  it  will  be  observed  that 
I  am  not  about  to  overstep  my  limits  and  discuss 


84   ffOW  LOMBARD  STREET  CAME    TO  EXIST,  AND 

this  as  a  question  of  currency.  In  what  form  the 
best  paper  currency  can  be  supplied  to  a  country 
is  a  question  of  economical  theory  with  which  1 
do  not  meddle  here.  I  am  only  narrating-  un- 
questionable history,  not  dealing  with  an  argu- 
ment where  every  step  is  disputed.  And  part  oi 
this  certain  history  is  that  the  best  way  to  diffuse 
banking  in  a  community  is  to  allow  the  banker  to 
issue  bank-notes  of  small  amount  that  can  super- 
sede the  metal  currency.  This  amounts  to  a 
subsidy  to  each  banker  to  enable  him  to  keep 
open  a  bank  till  depositors  choose  to  come  to  it. 
The  country  where  deposit  banking  is  most  dif- 
fused is  Scotland,  and  there  the  original  profits 
were  entirely  derived  from  the  circulation.  The 
note  issue  is  now  a  most  trifling  part  of  the  liabili- 
ties of  the  Scotch  banks,  but  it  was  once  their 
mainstay  and  source  of  profit.  A  curious  book, 
lately  published,  has  enabled  us  to  follow  the 
course  of  this  in  detail.  The  Bank  of  Dundee, 
now  amalgamated  with  the  Royal  Bank  of  Scot- 
land, was  founded  in  1763,  and  had  become  before 
its  amalgamation,  eight  or  nine  years  since,  a  bank 
of  considerable  deposits.  But  for  twenty-five 
years  from  its  foundation  it  had  no  deposits  at  all. 
it  subsisted  mostly  on  its  note  issue,  and  a  littlt 
on  its  remittance  business.  Only  in  1792,  after 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  85 

nearly  thirty  years,  it  began  to  gain  deposits,  but 
from  that  time  they  augmented  very  rapidly.*  The 
banking  history  of  England  has  been  the  same, 
though  we  have  no  country  bank  accounts  in  de- 
tail which  go  back  so  far.  But  probably  up  to  1830 
in  England,  or  thereabouts,  the  main  profit  ol 
banks  was  derived  from  the  circulation,  and  for 
many  years  after  that  the  deposits  were  treated  as 
very  minor  matters,  and  the  whole  of  so-called 
banking  discussion  turned  on  questions  of  circula- 
tion. We  are  still  living  in  the  debris  of  that  con- 
troversy, for,  as  I  have  so  often  said,  people  can 
hardly  think  of  the  structure  of  Lombard  Street, 
except  with  reference  to  the  paper  currency  and  to 
the  Act  of  1844,  which  regulates  it  now.  The 
French  are  still  in  the  same  epoch  of  the  subject. 
Their  great  enquete  of  1865  is  almost  wholly  taken 
up  with  currency  matters,  and  mere  banking  is 
treated  as  subordinate.  And  the  accounts  of  the 
Bank  of  France  show  why.  The  last  weekly  state- 
ment before  the  German  war  showed  that  the  cir- 
culation of  the  Bank  of  France  was  as  much  as 
59,2}4,ooo/.,  and  that  the  private  deposits  were 
only  I7,i27,ooo/.  Now  the  private  deposits  are 
about  the  same,  and  the  circulation  is  1 1 2,ooo,ooo/. 
So  difficult  is  it  in  even  a  great  country  like  France 

*  See  Note  C  in  Appendix. 


S6  HOW  LOMBARD  STREET  CAME    TO  EXIST,  AND 

for  the  deposit  system  of  banking  to  take  root,  and 
establish  itself  with  the  strength  and  vigour  that  it 
has  in  England. 

The  experience  of  Germany  is  the  same.  The 
accounts  preceding  the  war  in  North  Germany 
showed  the  circulation  of  the  issuing  banks  to  be 
39,875,0007.,  and  the  deposits  to  be  6,472,ooo/. 
while  the  corresponding  figures  at  the  present 
moment  are — circulation,  6o,ooo,ooo/.  and  deposits 
8,ooo,ooo/.  It  would  be  idle  to  multiply  instances. 

The  reason  why  the  use  of  bank  paper  com- 
monly precedes  the  habit  of  making  deposits  in 
banks  is  very  plain.  It  is  a  far  easier  habit  to 
establish.  In  the  issue  of  notes  the  banker,  the 
person  to  be  most  benefited,  can  do  something. 
He  can  pay  away  his  own  '  promises '  in  loans,  in 
wages,  or  in  payment  of  debts.  But  in  the  get- 
ting of  deposits  he  is  passive.  His  issues  depend 
on  himself;  his  deposits  on  the  favour  of  others. 
And  to  the  public  the  change  is  far  easier  too. 
To  collect  a  great  mass  of  deposits  with  the  same 
banker,  a  great  number  of  persons  must  agree  to 
do  something.  But  to  establish  a  note  circulation, 
a  large  number  of  persons  need  only  do  nothing. 
They  receive  the  banker's  notes  in  the  common 
course  of  their  business,  and  they  have  only  not 
to  take  those  notes  to  the  banker  for  payment 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  87  < 

If  the  public  refrain  from  taking  trouble,  a  paper 
circulation  is  immediately  in  existence.  A  paper 
circulation  is  begun  by  the  banker,  and  requires 
no  effort  on  the  part  of  the  public ;  on  the  con- 
trary, it  needs  an  effort  of  the  public  to  be  rid  of 
notes  once  issued  ;  but  deposit  banking  cannot  be 
begun  by  the  banker,  and  requires  a  spontaneous 
and  consistent  effort  in  the  community.  And 
therefore  paper  issue  is  the  natural  prelude  to 
deposit  banking. 

The  way  in  which  the  issue  of  notes  by  a 
banker  prepares  the  way  for  the  deposit  of  money 
with  him  is  very  plain.  When  a  private  person 
begins  to  possess  a  great  heap  of  bank-notes,  it 
will  soon  strike  him  that  he  is  trusting  the  banker 
very  much,  and  that  in  return  he  is  getting 
nothing.  He  runs  the  risk  of  loss  and  robbery 
just  as  if  he  were  hoarding  coin.  He  would  run  no 
more  risk  by  the  failure  of  the  bank  if  he  made  a 
deposit  there,  and  he  would  be  free  from  the  risk 
of  keeping  the  cash.  No  doubt  it  takes  time  before 
even  this  simple  reasoning  is  understood  by  un- 
educated minds.  So  strong  is  the  wish  of  most 
people  to  see  their  money  that  they  for  some  time 
continue  to  hoard  bank-notes  :  for  a  long  period  a 
few  do  so.  But  in  the  end  common  sense  con- 
quers, The  circulation  of  bank-notes  decreases, 


88  HOW  LLMBARD  STREET  CAME    TO  EXIST,  AND 

and  the  deposit  of  money  with  the  banker  in« 
creases.  The  credit  of  the  banker  having  been 
efficiently  advertised  by  the  note,  and  accepted  by 
the  public,  he  lives  on  the  credit  so  gained  years 
after  the  note  issue  itself  has  ceased  to  be  very 
important  to  him. 

The  efficiency  of  this  introduction  is  proportional 
to  the  diffusion  of  the  right  of  note  issue.  A,  single 
monopolist  issuer,  like  the  Bank  of  France,  works 
its  way  with  difficulty  through  a  country,  and 
advertises  banking  very  slowly.  Even  now  the 
Bank  of  France,  which,  I  believe,  by  law  ought  to 
have  a  branch  in  each  Department,  has  only 
branches  in  sixty  out  of  eighty-six.  On  the  other 
hand,  the  Swiss  banks,  where  there  is  always  one 
or  more  to  every  Canton,  diffuse  banking  rapidly. 
We  have  seen  that  the  liabilities  of  the  Bank  of 

France  stand  thus  : 

£ 

Notes 112,000,000 

Deposits 15,000,000 

But  the  aggregate  Swiss  banks,  on  the  contrary, 

st.md  : — 

£ 

Notes 761,000 

Deposits 4,709,000* 

The   reason   is   that   a   central   bank,    which   is 

*  These  are  the  amounts  at  December  31,  1865.  Sec  '  Grundziige 
derNational-Oekonomie.  Von  Max  Wirth.'  Dritter  Band,  p.  491. 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  89 

governed  in  the  capital  and  descends  on  a  country 
district,  has  much  fewer  modes  of  lending  money 
safely  than  a  bank  of  which  the  partners  belong 
to  that  district,  and  know  the  men  and  things  in  it. 
A  note  issue  is  mainly  begun  by  loans  ;  there  are 
then  no  deposits  to  be  paid.  But  the  mass  of 
loans  in  a  rural  district  are  of  small  amount ;  the 
bills  to  be  discounted  are  trifling  ;  the  persons  bor- 
rowing are  of  small  means  and  only  local  repute  ; 
the  value  of  any  property  they  wish  to  pledge  de-. 
pends  on  local  changes  and  local  circumstances.  A 
banker  who  lives  in  the  district,  who  has  always 
lived  there,  whose  whole  mind  is  a  history  of  the 
district  and  its  changes,  is  easily  able  to  lend 
money  safely  there.  But  a  manager  deputed  by  a 
single  central  establishment  does  so  with  difficulty. 
The  worst  people  will  come  to  him  and  ask  for 
loans.  His  ignorance  is  a  mark  for  all  the  shrewd 
and  crafty  people  thereabouts.  He  will  have 
endless  difficulties  in  establishing  the  circulation 
of  the  distant  bank,  because  he  has  not  the  local 
knowledge  which  alone  can  teach  him  how  to 
issue  that  circulation  with  safety. 

A  system  of  note  issues  is  therefore  the  best 
introduction  to  a  large  system  of  deposit  banking. 
As  yet,  historically,  it  is  the  only  introduction  : 
no  nation  as  yet  has  arrived  at  a  great  system  of 


90   HOW  LOMBARD  STREET  CAME    TO   EXIST,  AND 

deposit  banking  without  going  first  through  the 
preliminary  stage  of  note  issue,  and  of  such  note 
issues  the  quickest  and  most  efficient  in  this  way 
is  one  made  by  individuals  resident  in  the  district, 
and  conversant  with  it. 

And  this  explains  why  deposit  banking  is   so 
rare.     Such  a  note  issue  as  has  been  described  is 

"  possible  only  in  a  country  exempt  from  invasion, 
and  free  from  revolution.  During  an  invasion 
note-issuing  banks  must  stop  payment ;  a  run  is 
nearly  inevitable  at  such  a  time,  and  in  a  revolu- 
tion too.  In  such  great  and  close  civil  dangers 
a  nation  is  always  demoralised ;  everyone  looks 
to  himself,  and  everyone  likes  to  possess  him- 
self of  the  precious  metals.  These  are  sure  to 
be  valuable,  invasion  or  no  invasion,  revolution  or 
no  revolution.  But  the  goodness  of  bank-notes 
depends  on  the  solvency  of  the  banker,  and  that 
solvency  may  be  impaired  if  the  invasion  is  not 
repelled  or  the  revolution  resisted. 

Hardly  any  continental  country  has   been   till 
now  exempt  for  long  periods  both  from  invasion 

land  revolution.  In  Holland  and  Germany — two 
countries  where  note  issue  and  deposit  banking 
would  seem  as  natural  as  in  England  and  Scot- 
land— there  was  never  any  security  from  foreign 
war.  A  profound  apprehension  of  external  in- 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  g\ 

vasion  penetrated  their  whole  habits,  and  men  of 
business  would  have  thought  it  insane  not  to  con- 
template a  contingency  so  frequent  in  their  history, 
and  perhaps  witnessed  by  themselves. 

France  indeed,  before  1789,  was  an  exception. 
For  many  years  under  the  old  regime  she  was 
exempt  from  serious  invasion  or  attempted  revo- 
lution. Her  Government  was  fixed,  as  was  then 
thought,  and  powerful ;  it  could  resist  any  external 
enemy,  and  the  prestige  on  which  it  rested  seemed 
too  firm  to  fear  any  enemy  from  within.  But 
then  it  was  not  an  honest  Government,  and  it  had 
shown  its  dishonesty  in  this  particular  matter  of 
note  issue.  The  regent  in  Law's  time  had  given 
a  monopoly  of  note  issue  to  a  bad  bank,  and  had 
paid  off  the  debts  of  the  nation  in  worthless  paper. 
The  Government  had  created  a  machinery  of 
ruin,  and  had  thriven  on  it.  Among  so  appre- 
hensive a  race  as  the  French  the  result  was  fatal. 
For  many  years  no  attempt  at  note  issue  01 
deposit  banking  was  possible  in  France.  So  late 
as  the  foundation  of  the  Caisse  (T Escompte,  in 
Turgot's  time,  the  remembrance  of  Law's  failure 
was  distinctly  felt,  and  impeded  the  commence- 
ment of  better  attempts. 

This   therefore    is    the   reason   why   Lombard 
Street  exists  ;  that    is,  why    England    is  a  very 


92   HOW  LOMBARD  STREET  CAME    TO  EXIST,  AND 

great  Money  Market,  and  other  European  coun- 
tries but  small  ones  in  comparison.  In  England 
and  Scotland  a  diffused  system  of  note  issues 
started  banks  all  over  the  country  ;  in  these  banks 
the  savings  of  the  country  have  been  lodged,  and 
by  these  they  have  been  sent  to  London.  No 
similar  system  arose  elsewhere,  and  in  conse- 
quence London  is  full  of  money,  and  all  conti- 
nental cities  are  empty  as  compared  with  it. 

ii. 

The  monarchical  form  of  Lombard  Street  is 
due  also  to  the  note  issue.  The  origin  of  the 
Bank  of  England  has  been  told  by  Macaulay,  and 
it  is  never  wise  for  an  ordinary  writer  to  tell 
again  what  he  has  told  so  much  better.  Nor  is  it 
necessary,  for  his  writings  are  in  everyone's 
hands.  Still  I  must  remind  my  readers  of  the 
curious  story. 

Of  all  institutions  in  the  world  the  Bank  of 
England  is  now  probably  the  most  remote  from 
party  politics  and  from  '  financing.'  But  in  its 
origin  it  was  not  only  a  finance  company,  but  a 
Whig  finance  company.  It  was  founded  by  a 
Whig  Government  because  it  was  in  desperate 
want  of  money,  and  supported  by  the  '  City ' 
because  the  '  City  '  was  Whig.  Very  briefly,  the 


WHY  IT  ASSUMED  ITS  PRESENT  FORM. 


93 


story  was  this.  The  Government  of  Charles  II. 
(under  the  Cabal  Ministry)  had  brought  the  credit 
of  the  English  State  to  the  lowest  possible  point. 
It  had  perpetrated  one  of  those  monstrous  frauds, 
which  are  likewise  gross  blunders.  The  gold- 
smiths, who  then  carried  on  upon  a  trifling  scale 
what  we  should  now  call  banking,  used  to  deposit 
their  reserve  of  treasure  in  the  '  Exchequer/  with 
the  sanction  and  under  the  care  of  the  Govern- 
ment. In  many  European  countries  the  credit  of 
the  State  had  been  so  much  better  than  any  other 
credit,  that  it  had  been  used  to  strengthen  the 
beginnings  of  banking.  The  credit  of  the  state  had 
been  so  used  in  England :  though  there  had  lately 
been  a  civil  war  and  several  revolutions,  the  honesty 
of  the  English  Government  was  trusted  implicitly. 
But  Charles  II.  showed  that  it  was  trusted  unde- 
servedly. He  shut  up  the  '  Exchequer/  would 
pay  no  one,  and  so  the  '  goldsmiths  '  were  ruined. 
The  credit  of  the  Stuart  Government  never 
recovered  from  this  monstrous  robbery,  and  the 
Government  created  by  the  Revolution  of  1688 
could  hardly  expect  to  be  more  trusted  with 
money  than  its  predecessor.  A  Government 
created  by  a  revolution  hardly  ever  is.  There  is 
a  taint  of  violence  which  capitalists  dread  instinc- 
tively, and  there  is  always  a  rational  apprehension 


94  HOW  LOMBARD  STREET  CAME    TO   EXIST,  AND 

that  the  Government  which  one  revolution 
thought  fie  to  set  up  another  revolution  may  think 
lit  to  pull  down.  In  1694,  the  credit  of  William 
III.'s  Government  was  so  low  in  London  that  it 
was  impossible  for  it  to  borrow  any  large  sum ; 
and  the  evil  was  the  greater,  because  in  conse- 
quence of  the  French  war  the  financial  straits  of 
the  Government  were  extreme.  At  last  a  scheme 
was  hit  upon  which  would  relieve  their  necessities. 
*  The  plan/  says  Macaulay,  '  was  that  twelve 
hundred  thousand  pounds  should  be  raised  at 
what  was  then  considered  as  the  moderate  rate  of 
8  per  cent.'  In  order  to  induce  the  subscribers  to 
advance  the  money  promptly  on  terms  so  un- 
favourable to  the  public,  the  subscribers  were  to 
be  incorporated  by  the  name  of  the  Governor  and 
Company  of  the  Bank  of  England.  They  were 
so  incorporated,  and  the  i,2OO,ooo/.  was  obtained. 
On  many  succeeding  occasions,  their  credit  was 
of  essential  use  to  the  Government.  Without 
their  aid,  our  National  Debt  could  not  have  been 
borrowed ;  and  if  we  had  not  been  able  to  raise 
that  money  we  should  have  been  conquered  by 
France  and  compelled  to  take  back  James  II. 
And  for  many  years  afterwards  the  existence  ol 
that  debt  was  a  main  reason  why  the  industrial 
classes  never  would  think  of  recalling  the 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  95 

Pretender,  or  of  upsetting  the  revolution  settle-  y 
ment.  The  *  fund-holder '  is  always  considered 
in  the  books  of  that  time  as  opposed  to  his 
'  legitimate '  sovereign,  because  it  was  to  be 
feared  that  this  sovereign  would  repudiate  the 
debt  which  was  raised  by  those  who  dethroned 
him,  and  which  was  spent  in  resisting  him  and  his 
allies.  For  a  long  time  the  Bank  of  England 
was  the  focus  of  London  Liberalism,  and  in  that 
capacity  rendered  to  the  State  inestimable  ser- 
vices. In  return  for  these  substantial  benefits 
the  Bank  of  England  received  from  the  Govern 
ment,  either  at  first  or  afterwards,  three  most 
important  privileges. 

First.  The  Bank  of  England  had  the  exclusive  •• 
possession  of  the  Government  balances.  In  its 
first  period,  as  I  have  shown,  the  Bank  gave  credit 
to  the  Government,  but  afterwards  it  derived 
credit  from  the  Government.  There  is  a  natural 
tendency  in  men  to  follow  the  example  of  the 
Government  under  which  they  live.  The  Govern- 
ment is  the  largest,  most  important,  and  most  con- 
spicuous entity  with  which  the  mass  of  any  people 
are  acquainted ;  its  range  of  knowledge  must 
always  be  infinitely  greater  than  the  average  of 
tacir  knowledge,  and  therefore,  unless  there  is  a 
conspicuous  warning  to  the  contrary,  most  men  are 


96  HOW  LOMBARD  STREET  CAME    TO  EXIST,  AKD 

inclined  to  think  their  Government  right,  and, 
when  they  can,  to  do  what  it  does.  Especially  in 
money  matters  a  man  might  fairly  reason — '  If  the 
Government  is  right  in  trusting  the  Bank  of 
England  with  the  great  balance  of  the  nation,  I 
cannot  be  wrong  in  trusting  it  with  my  little 
balance.' 

Second.  The  Bank  of  England  had,  till  lately, 
the  monopoly  of  limited  liability  in  England.  The 
common  law  of  England  knows  nothing  of  any 
such  principle.  It  is  only  possible  by  Royal 
Charter  or  Statute  Law.  And  by  neither  of  these 
was  any  real  bank  (I  do  not  count  absurd  schemes 
such  as  Chamberlayne's  Land  Bank)  permitted 
with  limited  liability  in  England  till  within  these 
few  years.  Indeed,  a  good  many  people  thought 
it  was  right  for  the  Bank  of  England,  but  not 
right  for  any  other  bank.  I  remember  hearing  the 
conversation  of  a  distinguished  merchant  in  the 
City  of  London,  who  well  represented  the  ideas 
then  most  current.  He  was  declaiming  against 
banks  of  limited  liability,  and  some  one  asked— 
1  Why,  what  do  you  say,  then,  to  the  Bank  of 
England,  where  you  keep  your  own  account  ?  ' 
'  Oh  ! '  he  replied,  '  that  is  an  exceptional  case.' 
And  no  doubt  it  was  an  exception  of  the  greatest 
value  to  the  Bank  of  England,  because  it  induced 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  97 

many  quiet  and  careful  merchants  to  be  directors 
of  the  Bank,  who  certainly  would  not  have  joined 
any  bank  where  all  their  fortunes  were  liable,  and 
where  the  liability  was  not  limited. 

Thirdly.  The  Bank  of  England  had  the  privi- 
lege of  being  the  sole  joint  slock  company  per- 
mitted to  issiie  bank  notes  in  England.  Private 
London  bankers  did  indeed  issue  notes  down  to 
the  middle  of  the  last  century,  but  no  joint  stock 
company  could  do  so.  The  explanatory  clause  of 
the  Act  of  1742  sounds  most  curiously  to  our 
modern  ears.  '  And  to  prevent  any  doubt  that 
may  arise  concerning  the  privilege  or  power  given 
to  the  said  governor  and  company  ' — that  is,  the 
Bank  of  England — '  of  EXCLUSIVE  BANKING  ;  and 
also  in  regard  to  creating  any  other  bank  or  banks 
by  Parliament,  or  restraining  other  persons  from 
banking  during  the  continuance  of  the  said  privi- 
lege granted  to  the  governor  and  company  of  the 
Bank  of  England,  as  before  recited  ; — it  is  hereby 
further  enacted  and  declared  by  the  authority 
aforesaid,  that  it  is  the  true  intent  and  meaning  of 
the  said  Act  that  no  other  bank  shall  be  created, 
established,  or  allowed  by  Parliament,  and  that  it 
shall  not  be  lawful  for  any  body  politic  or  corporate 
whatsoever  created  or  to  be  created,  or  for  any 
other  persons  whatsoever  united  or  to  be  united  in 


08  •  HOW  LOMBARD  STREET  CAME    TO  EXIST,  AND 

covenants  or  partnership  exceeding  the  number  ol 
six  persons  in  that  part  of  Great  Britain  called 
England,  to  borrow,  owe,  or  take  up  any  sum  or 
sums  of  money  on  their  bills  or  notes  payable  on 
demand  or  at  any  less  time  than  six  months  from 
the  borrowing  thereof  during  the  continuance  of 
such  said  privilege  to  the  said  governor  and  com- 
pany, who  are  hereby  declared  to  be  and  remain  a 
corporation  with  the  privilege  of  exclusive  bank- 
ing, as  before  recited.'  To  our  modern  ears  these 
words  seem  to  mean  more  than  they  did.  The 
term  banking  was  then  applied  only  to  the  issue  of 
notes  and  the  taking  up  of  money  on  bills  on 
demand.  Our  present  system  of  deposit  banking, 
in  which  no  bills  or  promissory  notes  are  issued,  was 
not  then  known  on  a  great  scale,  and  was  not 
called  banking.  But  its  effect  was  very  important. 
It  in  time  gave  the  Bank  of  England  the  monopoly 
of  the  note  issue  of  the  Metropolis.  It  had  at 
that  time  no  branches,  and  so  it  did  not  compete 
for  the  country  circulation.  But  in  the  Metropolis, 
where  it  did  compete,  it  was  completely  victorious. 
No  company  but  the  Bank  of  England  could  issue 
notes,  and  unincorporated  individuals  gradually 
gave  way,  and  ceased  to  do  so.  Up  to  1844 
London  private  bankers  might  have  issued  notes 
if  they  pleased,  but  almost  a  hundred  years  ago  they 


WHY  IT  ASSUMED  ITS  PRESENT  FORM.  99 

were  forced  out  of  the  field.  The  Bank  of  Eng- 
land has  so  long  had  a  practical  monopoly  of  the 
circulation,  that  it  is  commonly  believed  always 
to  have  had  a  legal  monopoly. 

And  the  practical  effect  of  the  clause  went 
further  :  it  was  believed  to  make  the  Bank  of 
England  the  only  joint  stock  company  that  could 
receive  deposits,  as  well  as  the  only  company  that 
could  issue  notes.  The  gift  of  '  exclusive  bank- 
ing '  to  the  Bank  of  England  was  read  in  its  most 
natural  modern  sense  :  it  was  thought  to  prohibit 
any  other  banking  company  from  carrying  on  our 
present  system  of  banking.  After  joint  stock 
banking  was  permitted  in  the  country,  people 
began  to  inquire  why  it  should  not  exist  in  the 
Metropolis  too  ?  And  then  it  was  seen  that  the 
words  I  have  quoted  only  forbid  the  issue  of 
negotiable  instruments,  and  not  the  receiving  of 
money  when  no  such  instrument  is  given.  Upon 
this  construction,  the  London  and  Westminster 
Bank  and  all  our  older  joint  stock  banks  were 
founded.  But  till  they  began,  the  Bank  of  Eng- 
land had  among  companies  not  only  the  exclusive 
privilege  of  note  issue,  but  that  of  deposit  banking 
too.  It  was  in  every  sense  the  only  banking  com- 
pany in  London. 

With  so  many  advantages  over  all  competitors, 


r00  HOW  LOMBARD  STREET  CAME    TO  EXIST,  ETC. 

it  is  quite  natural  that  the  Bank  of  England  should 
have  far  outstripped  them  all.  Inevitably  it 
became  the  bank  in  London  ;  all  the  other  bankers 
grouped  themselves  round  it,  and  lodged  their 
reserve  with  it.  Thus  our  £W-reserve  system  of 
banking  was  not  deliberately  founded  upon  definite 
reasons  ;  it  was  the  gradual  consequence  of  many 
singular  events,  and  of  an  accumulation  of  legal 
privileges  on  a  single  bank  which  has  now  been 
altered,  and  which  no  one  would  now  defend. 


CHAPTER  IV. 

THE  POSITION  OF  THE  CHANCELLOR  CF  THE 
EXCHEQUER  IN  THE  MONEY  MARKET. 

NOTHING  can  be  truer  in  theory  than  the  economi 
cal  principle  that  banking  is  a  trade  and  only  a 
trade,  and  nothing  can  be  more  surely  established 
by  a  larger  experience  than  that  a  Government 
which  interferes  with  any  trade  injures  that  trade. 
The  best  thing  undeniably  that  a  Government  can 
do  with  the  Money  Market  is  to  let  it  take  care  of 
itself. 

But  a  Government  can  only  carry  out  this 
principle  universally  if  it  observe  one  condition  :  it 
must  keep  its  own  money.  The  Government  is 
necessarily  at  times  possessed  of  large  sums  in 
cash.  It  is  by  far  the  richest  corporation  in  the 
country  ;  its  annual  revenue  payable  in  money  far 
surpasses  that  of  any  other  body  or  person.  And 
if  it  begins  to  deposit  this  immense  income  as  it 
accrues  at  any  bank,  at  once  it  becomes  interested 


IO2    '    *'HE'  POSITION  OF   THE    CHANCELLOR   OF 

in  the  welfare  of  that  bank.  It  cannot  pay  the 
interest  on  its  debt  if  that  bank  cannot  produce  the 
public  deposits  when  that  interest  becomes  due ;  it 
cannot  pay  its  salaries,  and  defray  its  miscellaneous 
expenses,  if  that  bank  fail  at  any  time.  A  modern 
Government  is  like  a  very  rich  man  with  very 
great  debts  which  he  cannot  well  pay  ;  its  credit 
is  necessary  to  its  prosperity,  almost  to  its  exist- 
ence, and  if  its  banker  fail  when  one  of  its  debts 
becomes  due  its  difficulty  is  intense. 

Another  banker,  it  will  be  said,  may  take  up  the 
Government  account.  He  may  advance,  as  is  so 
often  done  in  other  bank  failures,  what  the  Govern- 
ment needs  for  the  moment  in  order  to  secure  the 
Government  account  in  future.  But  the  imperfec- 
tion of  this  remedy  is  that  it  fails  in  the  very  worst 
case.  In  a  panic,  and  at  a  general  collapse  of 
credit,  no  such  banker  will  probably  be  found. 
The  old  banker  who  possesses  the  Government 
deposit  cannot  repay  it,  and  no  banker  not  having 
that  deposit  will,  at  a  bad  crisis,  be  able  to  find  the 
5,ooo,ooo/.  or  6,ooo,ooo/.  which  the  quarter  day  of 
a  Government  such  as  ours  requires.  If  a  finance 
Minister,  having  entrusted  his  money  to  a  bank, 
begins  to  act  strictly,  and  say  he  will  in  all  cases 
let  the  Money  Market  take  care  of  itself,  the  reply 


THE  EXCHEQUER  IN  THE  MONEY  MARKET.    103 

is  that  in  one  case  the  Money  Market  will  take 
care  of  him  too,  and  he  will  be  insolvent. 

In  the  infancy  of  Banking  it  is  probably  much 
better  that  a  Government  should  as  a  rule  keep  its 
own  money.  If  there  are  not  Banks  in  which 
it  can  place  secure  reliance,  it  should  not 
seem  to  rely  upon  them.  Still  less  should  it  give 
peculiar  favour  to  any  one,  and  by  entrusting 
it  with  the  Government  account  secure  to-  it  a 
mischievous  supremacy  above  all  other  banks. 
The  skill  of  a  financier  in  such  an  age  is  to  equalise 
the  receipt  of  taxation,  and  the  outgoing  of  expen- 
diture ;  it  should  be  a  principal  care  with  him  to 
make  sure  that  more  should  not  be  locked  up  at  a 
particular  moment  in  the  Government  coffers  than 
is  usually  locked  up  there.  If  the  amount  of  dead 
capital  so  buried  in  the  Treasury  does  not  at 
any  time  much  exceed  the  common  average,  the 
evil  so  caused  is  inconsiderable :  it  is  only 
the  loss  of  interest  on  a  certain  sum  of  money, 
which  would  not  be  much  of  a  burden  on  the 
whole  nation  ;  the  additional  taxation  it  would 
cause  would  be  inconsiderable.  Such  an  -^vil  is 
nothing  in  comparison  with  that  of  losing  the 
money  necessary  for  inevitable  expence  by  entrust- 
ing it  to  a  bad  Bank,  or  that  of  recovering  this 
money  by  identifying  the  national  credit  with  the 


THE  POSITION  OF   THE    CHANCELLOR   OF 

bad  Bank  and  so  propping  it  up  and  perpetuating 
it.  So  long  as  the  security  of  the  Money  Market  is 
not  entirely  to  be  relied  on,  the  Government  of  a 
country  had  much  better  leave  it  to  itself  and  keep 
its  own  money.  If  the  banks  are  bad,  they  will 
certainly  continue  bad  and  will  probably  become 
worse  if  the  Government  sustains  and  encourages 
them.  The  cardinal  maxim  is,  that  any  aid  to  a 
present  bad  Bank  is  the  surest  mode  of  prevent 
ing  the  establishment  of  a  future  good  Bank. 

When  the  trade  of  Banking  began  to  be  bettei 
understood,  when  the  Banking  system  was 
thoroughly  secure,  the  Government  might  begin 
to  lend  gradually ;  especially  to  lend  the  unusual- 
ly large  sums  which  even  under  the  most  equable 
system  of  finance  will  at  times  accumulate  in 
the  public  exchequer. 

Under  a  natural  system  of  banking  it  would 
have  every  facility.  Where  there  were  many  banks 
keeping  their  own  reserve,  and  each  most  anxious 
to  keep  a  sufficient  reserve,  because  its  own  life 
and  credit  depended  on  it,  the  risk  of  the  Govern- 
ment in  keeping  a  banker  would  be  reduced  to  a 
minimum.  It  would  have  the  choice  of  many 
bankers,  and  w  3uld  not  be  restricted  to  any  one. 

Its  course  would  be  very  simple,  and  be 
analogous  to  that  of  other  public  bodies  in  the 


THE  EXCHEQUER  IN  THE  MONE}    MARKET.    105 

country.  The  Metropolitan  Board  of  Works, 
which  collects  a  great  revenue  in  London,  has  an 
account  at  the  London  and  Westminster  Bank, 
for  which  that  bank  makes  a  deposit  of  Consols 
as  a  security.  The  Chancellor  of  the  Exchequer 
would  have  no  difficulty  in  getting  such  security 
either.  If,  as  is  likely,  his  account  would  be 
thought  to  be  larger  than  any  single  bank  ought 
to  be  entrusted  with,  the  public  deposits  might 
be  divided  between  several.  Each  would  give 
security,  and  the  whole  public  money  would  be 
safe.  If  at  any  time  the  floating  money  in  the 
hands  of  Government  were  exceptionally  large, 
he  might  require  augmented  security  to  be  lodged, 
and  he  might  obtain  an  interest.  He  would  be  a 
lender  of  such  magnitude  and  so  much  influence, 
that  he  might  command  his  own  terms.  He 
might  get  his  account  kept  safe  if  anyone  could. 

If,  on  the  other  hand,  the  Chancellor  of  the 
Exchequer  were  a  borrower,  as  at  times  he  is,  he 
would  have  every  facility  in  obtaining  what  he 
wanted.  The  credit  of  the  English  Government 
is  so  good  that  he  could  borrow  better  than  any- 
one else  in  the  world.  He  would  have  greater 
facility,  indeed,  than  now,  for,  except  with  the 
leave  of  Parliament,  the  Chancellor  of  the  Ex- 
chequer cannot  borrow  by  our  present  laws  in  the 


I06        1HE>   POSITION  OF   THE   CHANCELLOR    OF 

open  market.  He  can  only  borrow  from  the 
Bank  of  England  on  what  are  called  '  deficiency 
bills.'  In  a  natural  system,  he  would  borrow  ol 
any  one  out  of  many  competing"  banks,  selecting 
the  one  that  would  lend  cheapest ;  but  under  our 
present  artificial  system,  he  is  confined  to  a  single 
bank,  which  can  fix  its  own  charge. 
•  If  contrary  to  expectation  a  collapse  occurred, 
the  Government  might  withdraw,  as  the  American 
Government  actually  has  withdrawn,  its  balance 
from  the  bankers.  It  might  give  its  aid,  lend  Ex- 
chequer bills,  or  otherwise  pledge  its  credit  for 
the  moment,  but  when  the  exigency  was  passed 
it  might  let  the  offending  banks  suffer.  There 
would  be  a  penalty  for  their  misconduct.  New 
and  better  banks,  who  might  take  warning  from 
that  misconduct,  would  arise.  As  in  all  natural 
trades*  what  is  old  and  rotten  would  perish,  what 
is  new  and  good  would  replace  it.  And  till  the 
new  banks  had  proved,  by  good  conduct,  their 
fitness  for  State  confidence,  the  State  need  not 
g\\  e  it.  The  Government  could  use  its  favour  as 
a  bounty  on  prudence,  and  the  withdrawal  of  that 
favour  as  a  punishment  for  culpable  folly. 

Under  a  good  system  of  banking,  a  great 
collapse,  except  from  rebellion  or  invasioh,  would 
probably  not  happen.  A  large  number  of  banks, 


IffE  EXCHEQUER  IN  THE  MONEY  MARKET.    107 

each  feeling  that  their  credit  was  at  stake  in  keep- 
ing a  good  reserve,  probably  would  keep  one  ;  \( 
any  one  did  not,  it  would  be  criticised  constantly, 
and  would  soon  lose  its  standing,  and  in  the  end 
disappear.  And  such  banks  would  meet  an  in- 
cipient panic  freely,  and  generously  ;  they  would 
advance  out  of  their  reserve  boldly  and  largely, 
for  each  individual  bank  would  fear  suspicion,  and 
know  that  at  such  periods  it  must '  show  strength/ 
if  at  such  times  it  wishes  to  be  thought  to  have 
strength.  Such  a  system  reduces  to  a  minimum 
the  risk  that  is  caused  by  the  deposit.  If  the 
national  money  can  safely  be  deposited  in  banks 
in  any  way,  this  is  the  way  to  make  it  safe. 

But  this  system  is  nearly  the  opposite  to  that 
which  the  law  and  circumstances  have  created  for 
us  in  England.  The  English  Government,  far 
from  keeping  cash  from  the  money  market  till 
the  position  of  that  market  was  reasonably  secure, 
at  a  very  early  moment,  and  while  credit  of  all 
kinds  was  most  insecure,  for  its  own  interests 
entered  into  the  Money  Market.  In  order  to 
effect  loans  better,  it  gave  the  custody  and  profit  of 
its  own  money  (along  with  other  privileges)  to  a 
single  bank,  and  therefore  practically  and  in  fact 
it  Is  identified  with  the  Bank  to  this  hour.  It  can- 
not let  the  money  market  take  care  of  itself  because 


108        THE  POSITION  OF   THE   CHANCELLOR   OP 

it  has  deposited  much  money  in  that  market,  and 
it  cannot  pay  its  way  if  it  loses  that  money. 

Nor  would  any  English  statesman  propose  to 
wind  up '  the  Bank  of  England.  A  theorist 
might  put  such  a  suggestion  on  paper,  but  no 
responsible  government  would  think  of  it.  At 
the  worst  crisis  and  in  the  worst  misconduct  oi 
the  Bank,  no  such  plea  has  been  thought  of:  in 
1825  when  its  till  was  empty,  in  1837  when  it 
had  to  ask  aid  from  the  Bank  of  France,  no  such 
idea  was  suggested.  By  irresistible  tradition  the 
English  Government  was  obliged  to  deposit  its 
money  in  the  money  market  and  to  deposit  with 
this  particular  Bank. 

And  this  system  has  plain  and  grave  evils. 

ist.  Because  being  created  by  state  aid,  it  is 
more  likely  than  a  natural  system  to  require 
state  help. 

2ndly.  Because,  being  a  6W-reserve  system,  it 
reduces  the  spare  cash  of  the  Money  Market  to  a 
smaller  amount  than  any  other  system,  and  so 
makes  that  market  more  delicate.  There  being  a 
(ess  hoard  to  meet  liabilities,  any  error  in  the 
management  of  that  reserve  has  a  proportionately 
greater  effect. 

3rdly.  Because,  our  one  reserve  is,  by  the  ne- 
cessity of  its  nature,  given  over  to  one  board  ol 


THE  EXCHEQUER  7Ar  THE  MO  KEY  MARKET.    [09 

directors,  and  we  are  therefore  dependent  on  the 
wisdom  of  that  one  only,  and  cannot,  as  in  most 
trades,  strike  an  average  of  the  wisdom  and  the 
folly,  the  discretion  and  the  indiscretion,  of  many 
competitors. 

Lastly.  Because  that  board  of  directors  is,  like 
every  other  board,  pressed  on  by  its  shareholders 
to  make  a  high  dividend,  and  therefore  to  keep  a 
small  reserve,  whereas  the  public  interest  imper- 
atively requires  that  they  shall  keep  a  large  one. 

These  four  evils  were  inseparable  from  the 
system,  but  there  is  besides  an  additional  and 
accidental  evil.  The  English  Government  not 
only  created  this  singular  system,  but  it  pro- 
ceeded to  impair  it,  and  demoralise  all  the 
public  opinion  respecting  it.  For  more  than  a 
century  after  its  creation  (notwithstanding  occa- 
sional errors)  the  Bank  of  England,  in  the  main, 
acted  with  judgment  and  with  caution.  Its  busi- 
ness was  but  small  as  we  should  now  reckon,  but 
for  the  most  part  it  conducted  that  business  with 
prudence  and  discretion.  In  1696,  it  had  been 
involved  in  the  most  serious  difficulties,  and  had 
been  obliged  to  refuse  to  pay  some  of  its  notes. 
For  a  long  period  it  was  in  wholesome  dread  of 
public  opinion,  and  the- necessity  of  retaining  pub- 
lic confidence  made  it  cautious.  But  the  English 


HO       THE  POSITION  OF   THE   CHANCELLOR   OF 

Government  removed  that  necessity.  In  1797, 
Mr.  Pitt  feared  that  he  might  not  be  able  to 
obtain  sufficient  specie  for  foreign  payments,  in 
consequence  of  the  low  state  of  the  Bank  re- 
nerve,  and  he  therefore  required  the  Bank  not 
to  pay  in  cash.  He  removed  the  preservative 
apprehension  which  is  the  best  security  of  all 
Banks. 

For  this  reason  the  period  under  which  the 
Bank  of  England  did  not  pay  gold  for  its  notes 
—the  period  from  1797  to  1819 — is  always  called 
the  period  of  the  Bank  restriction.  As  the  Bank 
during  that  period  did  not  perform,  and  was  not 
compelled  by  law  to  perform,  its  contract  of 
paying  its  notes  in  cash,  it  might  apparently  have 
been  well  called  the  period  of  Bank  license.  But 
the  word  '  restriction  '  was  quite  right,  and  was 
the  only  proper  word  as  a  description  of  the  policy 
of  1/97.  Mr.  Pitt  did  not  say  that  the  Bank  of 
England  need  not  pay  its  notes  in  specie ;  he 
'restricted'  them  from  doing  so;  he  said  that 
they  must  not. 

In  consequence,  from  1797  to  1844  (when  a 
new  era  begins),  there  never  was  a  proper  caution 
on  the  part  of  the  Bank  directors.  At  heart  they 
considered  that  the  Bank  of  England  had  a  kind 
of  charmed  life,  and  that  it  was  above  the  ordinary 


THE   EXCHEQUER  IN   THE  MONEY  MARKET.    \\\ 

banking  anxiety  to  pay  its  way.  And  this  feeling 
was  very  natural.  A  bank  of  issue,  which  need 
not  pay  its  notes  in  cash,  has  a  charmed  life ;  it 
can  lend  what  it  wishes,  and  issue  what  it  likes, 
with  no  fear  of  harm  to  itself,  and  with  no 
substantial  check  but  its  own  inclination.  For 
nearly  a  quarter  of  a  century,  the  Bank  of 
England  was  such  a  bank,  for  all  that  time  it 
could  not  be  in  any  danger.  And  naturally  the 
public  mind  was  demoralised  also.  Since  1797, 
the  public  have  always  expected  the  Government 
to  help  the  Bank  if  necessary.  I  cannot  fully 
discuss  the  suspensions  of  the  Act  of  1844  in 
1847,  1857,  and  1866 ;  but  indisputably  one  of 
their  effects  is  to  make  people  think  that  Govern- 
ment will  always  help  the  Bank  if  the  Bank  is  in 
extremity.  And  this  is  the  sort  of  anticipation 
which  tends  to  justify  itself,  and  to  cause  what  it 
expects. 

On  the  whole,  therefore,  the  position  of  the 
Chancellor  of  the  Exchequer  in  our  Money 
Market  is  that  of  one  who  deposits  largely  in  it, 
who  created  it,  and  who  demoralised  it.  He 
cannot,  therefore,  banish  it  from  his  thoughts, 
or  decline  responsibility  for  it.  He  must  arrange 
his  finances  so  as  not  to  intensify  panics,  but  to 
mitigate  them.  He  must  aid  the  Bank  of  England 


U2   THE   CHANCELLOR  IN   THE  MONEY  MARKET. 

in  the  discharge  of  its  duties  ;  he  must  not  impede 
or  prevent  it. 

His  aid  may  be  most  efficient.  He  is,  on 
finance,  the  natural  exponent  of  the  public  opinion 
of  England.  And  it  is  by  that  opinion  that  we 
wish  the  Bank  of  England  to  be  guided.  Under 
a  natural  system  of  banking  we  should  have 
relied  on  self-interest,  but  the  State  prevented 
that ;  we  now  rely  on  opinion  instead ;  the  public 
approval  is  a  reward,  its  disapproval  a  severe 
penalty,  on  the  Bank  directors  ;  and  of  these  it  is 
most  important  that  the  finance  minister  should 
be  a  sound  and  felicitous  exponent 


CHAPTER    V. 

THE     MODE     IN    vVHICH    THE    VALUE    OF    MONEY    IS 
SETTLED    IN    LOMBARD    STREET. 

MANY  persons  believe  that  the  Bank  of  England 
has  some  peculiar  power  of  fixing  the  value  of 
money.  They  see  that  the  Bank  of  England 
varies  its  minimum  rate  of  discount  from  time  to 
time,  and  that,  more  or  less,  all  other  banks  follow 
its  lead,  and  charge  much  as  it  charges  ;  and  they 
are  puzzled  why  this  should  be.  '  Money,'  as 
economists  teach,  '  is  a  commodity,  and  only  a 
commodity ; '  why  then,  it  is  asked,  is  its  value 
fixed  in  so  odd  a  way,  and  not  the  way  in  which 
the  value  of  all  other  commodities  is  fixed  ? 

There  is  at  bottom,  however,  no  difficulty  in  the 
matter.  The  value  of  money  is  settled,  like 
that  of  all  other  commodities,  by  supply  and  de- 
mand, and  only  the  form  is  essentially  different. 
In  other  commodities  all  the  large  dealers  fix  their 
own  price  ;  they  try  to  underbid  one  another*  and 


TI4  THE    MODE    TN   WHICH  THE    VALUK    Of 

that  keeps  down  the  price ;  they  try  to  get  as 
much  as  they  can  out  of  the  buyer,  and  that  keeps 
up  the  price.  Between  the  two  what  Adam  Smith 
calls  the  higgling  of  the  market  settles  it.  And 
this  is  the  most  simple  and  natural  mode  of  doing 
business,  but  it  is  not  the  only  mode.  If  circum- 
stances make  it  convenient  another  may  be 
adopted.  A  single  large  holder — especially  if  he 
be  by  far  the  greatest  holder — may  fix  his  price, 
and  other  dealers  may  say  whether  or  not  they 
will  undersell  him,  or  whether  or  not  they  will  ask 
more  than  he  does.  A  very  considerable  holder 
of  an  article  may,  for  a  time,  vitally  affect  its  value 
if  he  lay  down  the  minimum  price  which  he  will 
take,  and  obstinately  adhere  to  it.  This  is 
the  way  in  which  the  value  of  money  in  Lombard 
Street  is  settled.  The  Bank  of  England  used  to 
be  a  predominant,  and  is  still  a  most  important, 
dealer  in  money.  It  lays  down  the  least  price  at 
which  alone  it  will  dispose  of  its  stock,  and  this, 
for  the  most  part,  enables  other  dealers  to  obtain 
that  price,  or  something  near  it. 

The  reason  is  obvious.  At  all  ordinary  mo- 
ments there  is  not  money  enough  in  Lombard 
Street  to  discount  all  the  bills  in  Lombard  Street 
without  taking  some  money  from  the  Bank  ol 
England.  As  soon  as  the  Bank  rate  is  fixed,  a 


! 

, 


MONEY  IS  SETTLED  IN  LOMBARD  STREET.     n$ 

great  many  persons  who  have  bills  to  discount  try 
how  much  cheaper  than  the  Bank  they  can  get 
these  bills  discounted.  But  they  seldom  can  get 
them  discounted  very  much  cheaper,  for  if  they  did 
everyone  would  leave  the  Bank,  and  the  outer 
market  would  have  more  bills  than  it  could  bear. 

In  practice,  when  the  Bank  finds  this  process 
beginning,  and  sees  that  its  business  is  much 
diminishing,  it  lowers  the  rate,  so  as  to  secure  a 
reasonable  portion  of  the  business  to  itself,  and 
to  keep  a  fair  part  of  its  deposits  employed.  At 
Dutch  auctions  an  upset  or  maximum  price  used 
to  be  fixed  by  the  seller,  and  he  came  down  in  his 
bidding  till  he  found  a  buyer.  The  value  of 
money  is  fixed  in  Lombard  Street  in  much  the 
same  way,  only  that  the  upset  price  is  not  that  of 
all  sellers,  but  that  of  one  very  important  seller, 
some  part  of  whose  supply  is  essential. 

The  notion  that  the  Bank  of  England  has  a 
control  over  the  Money  Market,  and  can  fix  the 
rate  of  discount  as  it  likes,  has  survived  from  the 
old  days  before  1844,  when  the  Bank  could  issue 
as  many  notes  as  it  liked.  But  even  then  the 
notion  was  a  mistake.  A  bank  with  a  monopoly 
of  note  issue  has  great  sudden  power  in  the 
Money  Market,  but  no  permanent  power  :  it  can 
affect  the  rate  of  discount  at  any  particular  mo- 


Il6  THE   MODE  IN   WHICH  THE    VALUE   OF 

rnent,  but  it  cannot  affect  the  average  rate.  And 
the  reason  is,  that  any  momentary  fall  in  money, 
caused  by  the  caprice  of  such  a  bank,  of  itself 
tends  to  create  an  immediate  and  equal  rise,  so 
that  upon  an  average  the  value  is  not  altered. 

What  happens  is  this.  If  a  bank  with  a  mo- 
nopoly of  note  issue  suddenly  lends  (suppose) 
2,ooo,ooo/.  more  than  usual,  it  causes  a  propor- 
tionate increase  of  trade  and  increase  of  prices. 
The  persons  to  whom  that  2,ooo,ooo/.  was  lent,  did 
not  borrow  it  to  lock  it  up  ;  they  borrow  it,  in 
the  language  of  the  market,  to  '  operate  with  '- 
that  is,  they  try  to  buy  with  it ;  and  that  new 
attempt  to  buy — that  new  demand  raises  prices. 
And  this  rise  of  prices  has  three  consequences. 
First.  It  makes  everybody  else  want  to  borrow 
money.  Money  is  not  so  efficient  in  buying  as 
it  was,  and  therefore  operators  require  more 
money  for  the  same  dealings.  If  railway  stock 
is  10  per  cent,  dearer  this  year  than  last,  a 
speculator  who  borrows  money  to  enable  him  to 
deal  must  borrow  10  per  cent,  more  this  year  than 
last,  and  in  consequence  there  is  an  augmented 
demand  for  loans  Secondly.  This  is  an  effectual 
derpand,  for  the  increased  price  of  railway  stock 
enables  those  who  wish  it  to  borrow  more  upon 
it.  The  common  practice  is  to  lend  a  certain 


MONEY  IS  SETTLED  IN  LOMBARD  STREET,     nj 

portion  of  the  market  value  of  such  securities,  and 
if  that  value  increases,  the  amount  of  the  usual 
loan  to  be  obtained  on  them  increases  too.  In 
this  way,  therefore,  any  artificial  reduction  in  the 
value  of  money  causes  a  new  augmentation  of  the 
demand  for  money,  and  thus  restores  that  value 
to  its  natural  level.  In  all  business  this  is  well 
known  by  experience  :  a  stimulated  market  soon 
becomes  a  tight  market,  for  so  sanguine  are  enter- 
prising men,  that  as  soon  as  they  get  any  unusual 
ease  they  always  fancy  that  the  relaxation  is 
greater  than  it  is,  and  speculate  till  they  want 
more  than  they  can  obtain. 

In  these  two  ways  sudden  loans  by  an  issuer  of 
notes,  though  they  may  temporarily  lower  the 
value  of  money,  do  not  lower  it  permanently, 
because  they  generate  their  own  counteraction. 
And  this  they  do  whether  the  notes  issued  are 
convertible  into  coin  or  not.  During  the  period 
of  Bank  restriction,  from  1797  to  1819,  the  Bank 
of  England  could  not  absolutely  control  the  Money 
Market,  any  more  than  it  could  after  1819,  when 
it  was  compelled  to  pay  its  notes  in  coin.  But  in 
the  case  of  convertible  notes  there  is  a  third  effect, 
which  works  in  the  same  direction,  and  works 
more  quickly.  A  rise  of  prices,  confined  to  one 
country,  tends  to  increase  imports,  because  other 


Il8          THE  MODE  IN  WHICH  THE    VALUE    OF 

countries  can  obtain  more  for  their  goods  if  they 
send  them  there,  and  it  discourages  exports, 
because  a  merchant  who  would  have  gained  a 
profit  before  the  rise  by  buying  here  to  sell  again 
will  not  gain  so  much,  if  any,  profit  after  that  rise. 
By  this  augmentation  of  imports  the  indebtedness 
of  this  country  is  augmented,  and  by  this  diminu- 
tion of  exports  the  proportion  of  that  indebtedness 
which  is  paid  in  the  usual  way  is  decreased  also. 
In  consequence,  there  is  a  larger  balance  to  be 
paid  in  bullion  ;  the  store  in  the  bank  or  banks 
keeping  the  reserve  is  diminished,  and  the  rate  of 
interest  must  be  raised  by  them  to  stay  the  efflux. 
And  the  tightness  so  produced  is  often  greater 
than,  and  always  equal  to,  the  preceding  unnatural 
laxity. 

There  is,  therefore,  no  ground  for  believing,  as 
is  so  common,  that  the  value  of  money  is  settled 
by  different  causes  than  those  which  affect  the 
value  of  other  commodities,  or  that  the  Bank  oi 
England  has  any  despotism  in  that  matter.  It 
has  the  power  of  a  large  holder  of  money,  and 
no  more.  Even  formerly,  when  its  monetary 
powers  were  greater  and  its  rivals  weaker,  it  had 
no  absolute  control.  It  was  simply  a  large  cor- 
porate dealer,  making  bids  and  much  influencing 


MONEY  IS  SETTLED  IN  LOMBARD  STREET,    ng 

— though  in  no  sense  compelling — other  dealers 
thereby. 

But  though  the  value  of  money  is  not  settled 
in  an  exceptional  way,  there  is  nevertheless  a 
peculiarity  about  it,  as  there  is  about  many 
articles.  It  is  a  commodity  subject  to  great  fluct- 
uations of  value,  and  those  fluctuations  are  easily 
produced  by  a  slight  excess  or  a  slight  deficiency 
of  quantity.  Up  to  a  certain  point  money  is  a 
necessity.  If  a  merchant  has  acceptances  to 
meet  to-morrow,  money  he  must  and  will  find  to- 
day at  some  price  or  other.  And  it  is  this  urgent 
need  of  the  whole  body  of  merchants  which 
runs  up  the  value  of  money  so  wildly  and  to  such 
a  height  in  a  great  panic.  On  the  other  hand, 
money  easily  becomes  a  '  drug,'  as  the  phrase  is, 
and  there  is  soon  too  much  of  it.  The  number 
of  accepted  securities  is  limited,  and  cannot  be 
rapidly  increased ;  if  the  amount  of  money  seek- 
ing these  accepted  securities  is  more  than  can  be 
lent  on  them  the  value  of  money  soon  goes 
down.  You  may  often  hear  in  the  market  that 
bills  are  not  to  be  had, — meaning  good  bills  oi 
course, — and  when  you  hear  this  you  may  be 
sure  that  the  value  of  money  is  very  low. 

If  money  were  all  held  by  the  owners  of  it,  of 


120          THE  MODE  IN    WHICH  THE    VALUE  OF 

by  banks  which  did  not  pay  an  interest  for  it, 
the  value  of  money  might  not  fall  so  fast.  Money 
would,  in  the  market  phrase,  be  '  well  held.'  The 
possessors  would  be  under  no  necessity  to  employ 
it  all  ;  they  might  employ  part  at  a  high  rate 
rather  than  all  at  a  low  rate.  But  in  Lombard 
Street  money  is  very  largely  held  by  those  who 
do  pay  an  interest  for  it,  and  such  persons  must 
employ  it  all,  or  almost  all,  for  they  have  much 
to  pay  out  with  one  hand,  and  unless  they  receive 
much  with  the  other  they  will  be  ruined.  Such 
persons  do  not  so  much  care  what  is  the  rate  of 
interest  at  which  they  employ  their  money :  they 
can  reduce  the  interest  they  pay  in  proportion 
to  that  which  they  can  make.  The  vital  point  to 
them  is  to  employ  it  at  some  rate.  If  you  hold 
(as  in  Lombard  Street  some  persons  do)  millions 
of  other  people's  money  at  interest,  arithmetic 
teaches  that  you  will  soon  be  ruined  if  you  make 
nothing  of  it  even  if  the.  interest  you  pay  is  not 

i-.^h. ' 

The  fluctuations  in  the  value  of  money  are 
therefore  greater  than  those  on  the  value  of  most 
other  commodities.  At  times  there  is  an  exces- 
sive pressure  to  borrow  it,  and  at  times  an  exces- 
sive pressure  to  lend  it,  and  so  the  price  is  forced 
up  and  down. 


MONEY  IS  SETTLED  IN  LOMBARD  STREET.     i2\ 

These  considerations  enable  us  to  estimate  the 
responsibility  which  is  thrown  on  the  Bank  of 
England  by  our  system,  and  by  every  system  on 
the  bank  or  banks  who  by  it  keep  the  reserve  of 
bullion  or  of  I  egal  tender  exchangeable  for  bul- 
lion. These  banks  can  in  no  degree  control  the 
permanent  value  of  money,  but  they  can  com- 
pletely control  its  momentary  value.  They  can- 
not change  the  average  value,  but  they  can  deter- 
mine the  deviations  from  the  average.  If  the  dom- 
inant banks  manage  ill,  the  rate  of  interest  will  at 
one  time  be  excessively  high,  and  at  another  time 
excessively  low :  there  will  be  first  a  pernicious 
excitement,  and  next  a  fatal  collapse.  But  if  they 
manage  well,  the  rate  of  interest  will  not  deviate 
so  much  from  th?.  average  rate  ;  it  will  neither 
ascend  so  high  nor  descend  so  low.  As  far  as 
anything  can  be  steady  ihe  value  of  money  will 
then  be  steady,  and  probably  in  consequence  trade 
will  be  steady  too — at  least  a  principal  cause  of 
periodical  disturbance  will  have  b^eft  wi 
from  it. 

6 


CHAPTER    VI. 

WHY    LOMBARD    STREET    IS    OFTEN    VERY    DULL 
AND    SOMETIMES    EXTREMELY    EXCITED. 

ANY  sudden  event  which  creates  a  great  demand 
for  actual  cash  may  cause,  and  will  tend  to  cause, 
a  panic  in  a  country  where  cash  is  much  econ- 
omised, and  where  debts  payable  on  demand  are 
large.  In  such  a  country  an  immense  credit 
rests  on  a  small  cash  reserve,  and  an  unexpected 
and  large  diminution  of  that  reserve  may  easily 
break  up  and  shatter  very  much,  if  not  the  whole, 
of  that  credit.  Such  accidental  events  are  of  the 
most  various  nature  :  a  bad  harvest,  an  apprehen- 
sion of  foreign  invasion,  the  sudden  failure  of  a 
great  firm  which  everybody  trusted,  and  many 
other  similar  events,  have  all  caused  a  sudden 
demand  for  cash.  And  some  writers  have  en- 
deavoured to  classify  panics  according  to  the  nature 
of  the  particular  accidents  producing  them.  But 
little,  however,  is,  I  believe,  to  be  gained  by  such 


AND  SOMETIMES  EXCITED.  !2J 

classifications.  There  is  little  difference  in  the 
effect  of  one  accident  and  another  upon  our  credit 
system.  We  must  be  prepared  for  all  of  them, 
and  we  must  prepare  for  all  of  them  in  the  same 
way — by  keeping  a  large  cash  reserve. 

But  it  is  of  great  importance  to  point  out  that 
our  industrial  organisation  is  liable  not  only  to 
irregular  external  accidents,  but  likewise  to  regular 
internal  changes  ;  that  these  changes  make  our 
credit  system  much  more  delicate  at  some  times 
than  at  others ;  and  that  it  is  the  recurrence 
of  these  periodical  seasons  of  delicacy  which  has 
given  rise  to  the  notion  that  panics  come  accord- 
ing to  a  fixed  rule, — that  every  ten  years  or  so  we 
must  have  one  of  them. 

Most  persons  who  begin  to  think  of  the  subject 
are  puzzled  on  the  threshold.  They  hear  much 
of  '  good  times '  and  '  bad  times,'  meaning  by 
1  good '  times  in  which  nearly  everyone  is  very  well 
off,  and  by  '  bad '  times  in  which  nearly  everyone 
is  comparatively  ill  off.  And  at  first  it  is  natural 
to  ask  why  should  everybody,  or  almost  every- 
body, be  well  off  together  ?  Why  should  there 
be  any  great  tides  of  industry,  with  large  diffused 
profit  by  way  of  flow,  and  large  diffused  want  of 
profit,  or  loss,  by  way  of  ebb  ?  The  main  answer 
is  hardly  given  distinctly  in  our  common  books  of 


124       WHY  LOMBARD  STREET  IS  OFTEN  DULL* 

political  economy.  These  books  do  not  tell  you 
what  is  the  fund  out  of  which  large  general  profits 
are  paid  in  good  times,  nor  do  they  explain  why 
that  fund  is  not  available  for  the  same  purpose  in 
bad  times. 

Our  current  political  economy  does  not  suffi- 
ciently take  account  of  time  as  an  element  in  trade 
operations ;  but  as  soon  as  the  division  of  labour 
has  once  established  itself  in  a  community,  two 
principles  at  once  begin  to  be  important,  of  which 
time  is  the  very  essence.  These  are — 

First.  That  as  goods  are  produced  to  be  ex- 
changed, it  is  good  that  they  should  be  exchanged 
as  quickly  as  possible. 

Secondly.  That  as  every  producer  is  mainly 
occupied  in  producing  what  others  want,  and  not 
what  he  wants  himself,  it  is  desirable  that  he 
should  always  be  able  to  find,  without  effort, 
without  delay,  and  without  uncertainty,  others 
wrho  want  what  he  can  produce. 

In  themselves  these  principles  are  self-evident, 
Everyone  will  admit  it  to  be  expedient  that  all 
goods  wanting  to  be  sold  should  be  sold  as  soon 
as  they  are  ready ;  that  every  man  who  wants  to 
work  should  find  employment  as  soon  as  he  is 
ready  for  it.  Obviously  also,  as  soon  as  the 
*  division  of  labour '  is  really  established,  there  is 


AND  SOMETIMES  EXCITED.  125 

a  difficulty  about  both  of  these  principles.  A 
produces  what  he  thinks  B  wants,  but  it  may  be 
a  mistake,  and  B  may  not  want  it.  A  may  be 
able  and  willing  to  produce  what  B  wants,  but  he 
may  not  be  .able  to  find  B — he  may  not  know  of 
his  existence. 

The  general  truth  of  these  principles  is  obvious, 
but  what  is  not  obvious  .is  the  extreme  greatness 
of  their  effects.  Taken  together,  they  make  the 
whole  difference  between  times  of  brisk  trade  and 
great  prosperity,  and  times  of  stagnant  trade  and 
great  adversity,  so  far  as  that  prosperity  and  that 
adversity  are  real  and  not  illusory.  If  they  are 
satisfied,  everyone  knows  whom  to  work  for,  and 
what  to  make,  and  he  can  get  immediately  in 
exchange  what  he  wants  himself.  There  is  no 
idle  labour  and  no  sluggish  capital  in  the  whole 
community,  and,  in  consequence,  all  which  can 
be  produced  is  produced,  the  effectiveness  of 
human  industry  is  augmented,  and  both  kinds 
of  producers — both  capitalists  and  labourers — are 
much  richer  than  usual,  because  the  amount  to 
be  divided  between  them  is  also  much  greater 
than  usual, 

And  there  is  a  partnership  in  industries.  No 
single  large  industry  can  be  depressed  without 
injury  to  other  industries  ;  still  less  can  any  great 


126       WHY  LOMBARD  STREET  IS  OFTEN  DULL, 

group  of  industries.  Each  industry  when  pros- 
perous buys  and  consumes  the  produce  probably 
of  most  (certainly  of  very  many)  other  industries, 
and  if  industry  A  fail  and  is  in  difficulty,  industries 
B,  and  C,  and  D,  which  used  to  sell  to  it,  will 
not  be  able  to  sell  that  which  they  had  produced 
in  reliance  on  A's  demand,  and  in  future  they  will 
stand  idle  till  industry  A  recovers,  because  in 
default  of  A  there  will  be  no  one  to  buy  the  com- 
modities which  they  create.  Then  as  industry  B 
buys  of  C,  D,  &c.,  the  adversity  of  B  tells  on  C, 
D,  &c.,  and  as  these  buy  of  E,  F,  &c.,  the  effect  is 
propagated  through  the  whole  alphabet.  And  in 
a  certain  sense  it  rebounds.  Z  feels  the  want 
caused  by  the  diminished  custom  of  A,  B,  &  C,  and 
so  it  does  not  earn  so  much  ;  in  consequence,  it 
cannot  lay  out  as  much  on  the  produce  of  A,  B,  &  C, 
and  so  these  do  not  earn  as  much  either.  In  all 
this. money  is  but  an  instrument.  The  same  thing 
would  happen  equally  well  in  a  trade  of  barter, 
if  a  state  of  barter  on  a  very  large  scale  were  not 
practically  impossible,  on  account  of  the  time  and 
trouble  which  it  would  necessarily  require.  As 
has  been  explained,  the  fundamental  cause  is  that 
under  a  system  in  which  everyone  is  dependent 
on  the  labour  of  everyone  else,  the  loss  of  one 
spreads  and  multiplies  through  all,  and  spreads 


AND   SOMETIMES  EXCITED.  t2f 

and  multiplies  the  faster  the  higher  the  previous 
perfection  of  the  system  of  divided  labour,  and 
the   more  nice  and  effectual  the  mode  of  inter- 
change.    And  the    entire  effect  of  a   depression 
in  any  single  large  trade  requires  a  considerable 
time  before   it  can   be  produced.     It  has  to  be 
propagated,  and  to  be  returned  through  a  variety 
of  industries,  before  it  is  complete.    Short  depres- 
sions, inconsequence,  have  scarcely  any  discernible 
consequences  ;  they  are  over  before  we  think  of 
their  effects.     It  is  only  in  the  case  of  continuous 
and  considerable  depressions  that  the  cause  is  in 
action  long  enough  to  produce  discernible  effects. 
The  most  common,  and  by  far  the  most  impor- 
tant, case  where  the  depression  in  one  trade  causes 
depression   in   all   others,  is    that  of    depressed 
agriculture.     When  the  agriculture  of  the  world 
is  ill  off,    food   is  dear.     And  as  the  amount  of 
absolute  necessaries  which    a    people  consumes 
cannot  be  much  diminished,  the  additional  amount 
which  has  to  be  spent  on  them  is  so  much  sub- 
tracted from  what  used   to   be    spent   on   other 
things.     All  the  industries,  A,  B,  C,  D,  up  to  Z 
are  somewhat  affected  by  an  augmentation  in  the 
price  of  corn,  and  the  most  affected  are  the  large 
ones,  which  produce  the  objects  in  ordinary  times 
most  consumed  by  the  working   classes.       The 


f28       WHY  LOMBARL   STREET  IS   OFTEN  DULL, 

clothing  trades  feel  the  difference  at  once,  and  in 
this  country  the  liquor  trade  (a  great  source  oi 
English  revenue)  feels  it  almost  equally  soon, 
Especially  when  for  two  or  three  years  harvests 
have  been  bad  and  corn  has  long  been  dear, 
every  industry  is  :i.ipoverished,  and  almost  every 
one,  by  becoming  poorer,  makes  every  other 
poorer  too.  All' trades  are  slack  from  diminished 
custom,  and  the  consequence  is  a  vast  stagnant 
capital,  much  idle  labour,  and  a  greatly  retarded 
production. 

It  takes  two  or  three  years  to  produce  this  full 
calamity,  and  the  recovery  from  it  takes  two  or 
three  years  also.  If  corn  should  long  be  cheap, 
the  labouring  classes  have  much  to  spend  on 
what  they  like  besides.  The  producers  of  those 
things  become  prosperous,  and  have  a  greater  pur- 
chasing power.  They  exercise  it,  and  that  creates 
in  the  class  they  deal  with  another  purchasing 
power,  and  so  all  through  society.  The  whole 
machine  of  industry  is  stimulated  to  its  maximum 
of  energy,  just  as  before  much  of  it  was  slackened  • 
almost  to  its  minimum. 

A  great  calamity  to  any  great  industry  will 
tend  to  produce  the  same  effect,  but  the  fortunes 
of  the  industries  on  which  the  wages  of  labour  are 
expended  are  much  more  important  than  those  of 


AND  SOMETIMES  EXCITED.  1 29 

all  others,  because  they  act  much  more  quickly 
upon  a  larger  mass  of  purchasers.  On  principle, 
if  there  was  a  perfect  division  of  labour,  every 
industry  would  have  to  be  perfectly  prosperous  in 
order  that  any  one  might  be  so.  So  far,  there- 
fore, from  its  being  at  all  natural  that  trade  should 
develop  constantly,  steadily,  and  equably,  it  is 
plain,  without  going  farther,  from  theory  as  well 
as  from  experience,  that  there  are  inevitably  peri- 
ods of  rapid  dilatation,  and  as  inevitably  periods 
of  contraction  and  of  stagnation. 

Nor  is  this  the  only  changeable  element  in 
modern  industrial  societies.  Credit — the  disposi- 
tion of  one  man  to  trust  another — is  singularly 
varying.  In  England,  after  a  great  calamity, 
everybody  is  suspicious  of  everybody  ;  as  soon  as 
that  calamity  is  forgotten,  everybody  again  con- 
fides in  everybody.  On  the  Continent  there  has 
been  a  stiff  controversy  as  to  whether  credit  should 
or  should  not  be  called  '  capital :'  in  England, 
even  the  little  attention  once  paid  to  abstract 
economics  is  now  diverted,  and  no  one  cares  in 
the  least  for  refine!  questions  of  this  kind  :  the 
material  practical  point  is  that,  in  M.  Chevalier's 
language,  credit  is  '  additive,'  or  additional — that 
is,  in  times  when  credit  is  good  productive 
power  is  more  efficient,  and  in  times  when 


130       WHY  LOMBARD  STREET  IS   OFTEN  DULL, 

credit  is  bad  productive  power  is  less  efficient 
And  the  state  of  credit  is  thus  influential,  because 
of  the  two  principles  which  have  just  been  ex 
plained.  In  a  good  state  of  credit,  goods  lie  on 
hand  a  much  less  time  than  when  credit  is  bad  ; 
sales  are  quicker ;  intermediate  dealers  borrow 
easily  to  augment  their  trade,  and  so  more  and 
more  goods  are  more  quickly  and  more  easily 
transmitted  from  the  producer  to  the  consumer. 

These  two  variable  causes  are  causes  of  real 
prosperity.  They  augment  trade  and  production, 
and  so  are  plainly  beneficial,  except  where  by 
mistake  the  wrong  things  are  produced,  or  where 
also  by  mistake  misplaced  credit  is  given,  and  a 
man  who  cannot  produce  anything  which  is 
wanted  gets  the  produce  of  other  people's  labour 
upon  a  false  idea  that  he  will  produce  it.  But 
there  is  another  variable  cause  which  produces  far 
more  of  apparent  than  of  real  prosperity  and  of 
which  the  effect  is  in  actual  life  mostly  confused 
with  those  of  the  others. 

In  our  common  speculations  we  do  not  enough 
remember  that  interest  on  money  is  a  refined 
idea,  and  not  a  universal  one.  So  far  indeed 
is  it  from  being  universal,  that  the  majority 
of  saving  persons  in  most  countries  would 
reject  it.  Most  savings  in  most  countries 


AND  SOMETIMES  EXCITED.  13, 

are  held  in  hoarded  specie.  In  Asia,  in 
Africa,  in  South  America,  largely  even  in 
Europe,  they  are  thus  held,  and  it  would  frighten 
most  of  the  owners  to  let  them  out  of  their  keep- 
ing. An  Englishman — a  modern  Englishman  at 
least — assumes  as  a  first  principle  that  he  ought 
to  be  able  to  '  put  his  money  into  something  safe 
that  will  yield  5  per  cent. ; '  but  most  saving  persons 
in  most  countries  are  afraid  to  '  put  their  money  ' 
into  anything,  Nothing  is  safe  to  their  minds  ; 
indeed,  in  most  countries,  owing  to  a  bad  Govern- 
ment and  a  backward  industry,  no  investment,  or 
hardly  any,  really  is  safe.  In  most  countries 
most  men  are  content  to  forego  interest ;  but 
in  more  advanced  countries,  at  some  times  there 
are  more  savings  seeking  investment  than 
there  are  known  investments  for  ;  at  other  times 
there  is  no  such  superabundance.  Lord  Ma- 
caulay  has  graphically  described  one  of  the 
periods  of  excess.  He  says — '  During  the 
interval  between  the  Restoration  and  the  Revolu- 
tion the  riches  of  the  nation  had  been  rapidly 
increasing.  Thousands  of  busy  men  found  every 
Christmas  that,  after  the  expenses  of  the  year's 
housekeeping  had  been  defrayed  out  of  the  year's 
income,  a  surplus  remained  ;  and  how  that  surplus 
was  1:o  be  employed  was  a  question  of  some 


132       WHY.  LOMBARD  STREET  IS   OFTEN  DULL, 

difficulty.  In  our  time,  to  invest  such  a  surplus, 
at  something"  more  than  three  per  cent.,  on  the 
best  security  that  has  ever  been  known  in  the 
world,  is  the  work  of  a  few  minutes.  But  in  the 
seventeenth  century,  a  lawyer,  a  physician,  a 
retired  merchant,  who  had  saved  some  thousands, 
and  who  wished  to  place  them  safely  and  profit- 
ably, was  often  greatly  embarrassed.  Three 
generations  earlier,  a  man  who  had  accumulated 
wealth  in  a  profession  generally  purchased  real 
property,  or  lent  his  savings  on  mortgage.  But 
the  number  of  acres  in  the  kingdom  had  remained 
the  same ;  and  the  value  of  those  acres,  though  it 
had  greatly  increased,  had  by  no  means  increased 
so  fast  as  the  quantity  of  capital  which  was  seek- 
ing" for  employment.  Many  too  wished  to  put 
their  money  where  they  could  find  it  at  an  hour's 
notice,  and  looked  about  for  some  species  of 
property  which  could  be  more  readily  transferred 
than  a  house  or  a  field.  A  capitalist  might  lend 
on  bottomry  or  on  personal  security ;  but,  if  he 
did  so,  he  ran  a  great  risk  of  losing*  interest  and 
principal.  There  were  a  few  joint  stock  com- 
panies, among  which  the  East  India  Company 
held  the  foremost  place  ;  but  the  demand  for  the 
stock  of  such  companies  was  far  greater  than  the 
supply.  Indeed  the  cry  for  a  new  East  India 


AND   SOMETIMES  EXCITED 


133 


Company  was  chiefly  raised  by  persons  who  had 
found  difficulty  in  placing-  their  savings  at  interest 
on  good  security.  So  great  was  that  difficulty 
that  the  practice  of  hoarding  was  common.  We 
are  told  that  the  father  of  Pope,  the  poet,  who 
retired  from  business  in  the  City  about  the  time 
of  the  Revolution,  carried  to  a  retreat  in  the 
country  a  strong  box  containing  near  twenty 
thousand  pounds,  and  took  out  from  time  to  time 
what  was  required  for  household  expenses  ;  and 
it  is  highly  probable  that  this  was  not  a  solitary 
case.  At  present  the  quantity  of  coin  which  is 
hoarded  by  private  persons  is  so  small,  that  it 
would,  if  brought  forth,  make  no  perceptible 
addition  to  the  circulation.  But,  in  the  earlier 
part  of  the  reign  of  William  the  Third,  all  the 
greatest  writers  on  currency  were  of  opinion  that 
a  very  considerable  mass  of  gold  and  silver  was 
hidden  in  secret  drawers  and  behind  wainscots. 

'  The  natural  effect  of  this  state  of  things  was 
that  a  crowd  of  projectors,  ingenious  and  absurd, 
honest  and  knavish,  employed  themselves  in  de- 
vising new  schemes  for  the  employment  of 
redundant  capital.  It  was  about  the  year  1688 
that  the  word  stockjobber  was  first  heard  in 
London.  In  the  short  space  of  four  years  a 
crowd  of  companies,  every  one  of  which  confi- 


LOMBARD  STREET  IS    IF  TEN  DULL, 

dently  held  out  to  subscribers  the  hope  of  immense 
gains,  sprang  into  existence — the  Insurance  Com- 
pany, the  Paper  Company,  the  Lutestring  Com- 
pany, the  Pearl  Fishery  Company,  the  Glass 
Bottle  Company,  the  Alum  Company,  the  Blythe 
Coal  Company,  the  Swordblade  Company.  There 
was  a  Tapestry  Company,  which  would  soon 
furnish  pretty  hangings  for  all  the  parlours  of 
the  middle  class,  and  for  all  the  bedchambers 
of  the  higher.  There  was  a  Copper  Company, 
which  proposed  to  explore  the  mines  of  England, 
and  held  out  a  hope  that  they  would  prove  not 
less  valuable  than  those  of  Potosi.  There  was  a 
Diving  Company,  which  undertook  to  bring  up 
precious  effects  from  shipwrecked  vessels,  and 
which  announced  that  it  had  laid  in  a  stock  of 
wonderful  machines  resembling  complete  suits  of 
armour.  In  front  of  the  helmet  was  a  huge  glass 
eye  like  that  of  a  Cyclops  ;  and  out  of  the  crest 
went  a  pipe  through  which  the  air  was  to  be  ad- 
mitted. The  whole  process  was  exhibited  on  the 
Thames.  Fine  gentlemen  and  fine  ladies  were 
invited  to  the  show,  were  hospitably  regaled,  and 
were  delighted  by  seeing  the  divers  in  their 
panoply  descend  into  the  river  and  return  laden 
with  old  iron  and  ship's  tackle.  There  was  a 
Greenland  Fishing  Company,  which  could  not  fail 


AND  SOMETIMES  EXCITED.  135 

to  drive  the  Dutch  whalers  and  herring  busses 
out  of  the  Northern  Ocean.  There  was  a  Tan- 
ning Company,  which  promised  to  furnish  leather 
superior  to  the  best  that  was  brought  from 
Turkey  or  Russia.  There  was  a  society  which 
undertook  the  office  of  giving  gentlemen  a  liberal 
education  on  low  terms,  and  which  assumed  the 
sounding  name  of  the  Royal  Academies  Company. 
In  a  pompous  advertisement  it  was  announced 
that  the  directors  of  the  Royal  Academies  Com- 
pany had  engaged  the  best  masters  in  every 
branch  of  knowledge,  and  were  about  to  issue 
twenty  thousand  tickets  at  twenty  shillings  each. 
There  was  to  be  a  lottery — two  thousand  prizes 
were  to  be  drawn ;  and  the  fortunate  holders  of 
the  prizes  were  to  be  taught,  at  the  charge  of  the 
Company,  Latin,  Greek,  Hebrew,  French,  Spanish, 
conic  sections,  trigonometry,  heraldry,  japaning, 
fortification,  bookkeeping,  and  the  art  of  playing 
the  theorbo.' 

The  panic  was  forgotten  till  Lord  Macaulay 
revived  the  memory  of  it.  But,  in  fact,  in  the  South 
Sea  Bubble,  which  has  always  been  remembered, 
the  form  was  the  same,  only  a  little  more  extrava- 
gant ;  the  companies  in  that  mania  were  for  objects 
snch  as  these  : — '  "  Wrecks  to  be  fished  for  on  the 
Irish  Coast — Insurance  of  Horses  and  other  Cattle 


136       WHY  LOMBARD  STREET  IS  OFTEN  PULL, 

(two  millions) — Insurance  of  Losses  by  Servants — 
To  make 'Salt  Water  Fresh — For  building  oi 
Hospitals  for  Bastard  Children — For  building  of 
Ships  against  Pirates — For  making  of  Oil  from 
Sun -flower  Seeds — For  improving  of  Malt  Liquors 
— For  recovery  of  Seamen's  Wages — For  extract- 
ing of  Silver  from  Lead — For  the  transmuting  of 
Quicksilver  into  a  malleable  and  fine  Metal — For 
making  of  Iron  with  Pit-coal — For  importing  a 
Number  of  large  Jack  Asses  from  Spain- -For 
trading  in  Human  Hair — For  fatting  of  Hogs — 
For  a  Wheel  of  Perpetual  Motion."  But  the 
most  strange  of  all,  perhaps,  was  "  For  an  Under- 
taking which  shall  in  due  time  be  revealed." 
Each  subscriber  was  to  pay  down  two  guineas, 
and  hereafter  to  receive  a  share  of  one  hundred, 
with  a  disclosure  of  the  object ;  and  so  tempting 
was  the  offer,  that  1,000  of  these  subscriptions 
were  paid  the  same  morning,  with  which  the  pro- 
jector went  off  in  the  afternoon.'  In  1825  there 
were  speculations  in  companies  nearly  as  wild, 
and  just  before  1866  there  were  some  of  a  like 
nature,  though  not  equally  extravagant.  The 
fact  is,  that  the  owners  of  savings  not  finding, 
in  adequate  quantities,  their  usual  kind  of  in- 
vestments, rush  into  anything  that  promises  spe- 
ciously, and  when  •  they  find  that  these  specious 


AND  SOMETIMES  EXCITED. 


137 


investments  can  be  disposed  of  at  a  high  profit, 
they  rush  into  them  more  and  more.  The  first 
taste  is  for  high  interest,  but  that  taste  soon  be- 
comes secondary.  There  is  a  second  appetite  for 
targe  gains  to  be  made  by  selling  the  principal 
which  is  to  yield  the  interest.  So  long  as  such 
sales  can  be  effected  the  mania  continues ;  when 
it  ceases  to  be  possible  to  effect  them,  ruin  begins. 
So  long  as  the  saving^,  remain  in  possession 
of  their  owners,  these  hazardous  gamblings  in 
speculative  undertakings  are  aim  x-st  the  whole 
effect  of  an  excess  of  accumulation  over  tested 
investment.  Little  effect  is  produced  T  the 
general  trade  of  the  country.  The  owners  oi  the 
savings  are  too  scattered  and  far  from  the  market 
to  change  the  majority  of  mercantile  transactions. 
But  when  these  savings  come  to  be  lodged  in  the 
hands  of  bankers,  a  much  wider  result  is  produced. 
Bankers  are  close  to  mercantile  life  ;  they  are 
always  ready  to  lend  on  good  mercantile  securi- 
ties ;  they  wish  to  lend  on  such  securities  a  large 
part  of  the  money  entrusted  to  them.  When, 
therefore,  the  money  so  entrusted  is  unusually 
large,  and  when  it*  long  continues  so,  the  general 
trade  of  the  country  is,  in  the  course  of  time, 
changed.  Bankers  are  daily  more  and  more 
ready  to  lend  money  to  mercantile  men  ;  more  is 


!38       WHY  LOMBARD  STREET  IS  OFTEN  DULL, 

lent  to  such  men  ;  more  bargains  are  made  in 
consequence  ;  commodities  are  more  sought  after ; 
**nd,  in  consequence,  prices  rise  more  and  more. 

The  rise  of  prices  is  quickest  in  an  improving 
state  of  credit.  Prices  in  general  are  mostl) 
determined  by  wholesale  transactions.  The  retail 
dealer  adds  a  percentage  to  the  wholesale  prices, 
not,  of  course,  always  the  same  percentage,  but 
still  mostly  the  same.  Given  the  wholesale  price 
of  most  articles,  vju  can  commonly  tell  their  retail 
price.  Now  wholesale  transactions  are  commonly 
not  cash  transactions,  but  bill  transactions.  The 
dura*"'"  -ti  of  the  bill  varies  with  the  custom  of  the 
trc.de  ;  it  may  be  two,  three  months,  or  six  weeks, 
but  there  is  always  a  bill.  Times  of  credit  mean 
times  in  which  the  bills  of  many  people  are  taken 
readily  ;  times  of  bad  credit,  times  when  the  bills 
of  much  fewer  people  are  taken,  and  even  of  those 
suspiciously.  In  times  of  good  credit  there  are  a 
great  number  of  strong  purchasers,  and  in  times 
of  bad  credit  only  a  smaller  number  of  weak 
ones ;  and,  therefore,  years  of  improving  credit, 
if  there  be  no  disturbing  cause,  are  years  of  rising 
price,  and  years  of  decaying  credit,  years  of  failing 
price. 

This  is  the  meaning  of  the  saying  '  John  Bull 
can  stand  many  things,  but  he  cannot  stand  two 


A WD    SOMFTTMF.S  EXLCJTRD. 


13* 


per  cent. : '  it  means  that  the  greatest  effect  of  the 
three  great  causes  is  nearly  peculiar  to  England ; 
here,  and  here  almost  alone,  the  excess  of  savings 
over  investments  is  deposited  in  banks  ;  here, 
and  here  only,  is  it  made  use  of  so  as  to  affect 
trade  at  large  ;  here,  and  here  only,  are  prices 
gravely  affected!  In  these  circumstances,  a  low 
rate  of  interest,  long  protracted,  is  equivalent  to  a 
total  depreciation  of  the  precious  metals.  In  his 
book  on  the  effect  of  the  great  gold  discoveries, 
Professor  Jevons  showed,  and  so  far  as  I  know, 
was  the  first  to  show,  the  necessity  of  eliminating 
these  temporary  changes  of  value  in  gold  before 
you  could  judge  properly  of  the  permanent 
depreciation.  He  proved,  that  in  the  years  pre- 
ceding both  1847  and  1857  there  was  a  gen- 
eral rise  of  prices  ;  and  in  the  years  succeeding 
these  years,  a  great  fall.  The  same  might  be 
shown  of  the  years  before  and  after  1866,  mutatis 
mutandis. 

And  at  the  present  moment  we  have  a  still 
more  remarkable  example,  which  was  thus 
analysed  in  the  Economist  of  the  3Oth  December, 
1871,  in  an  article  which  I  venture  to  quote  as  a 
whole : — 


I4O       WHY  LOMBARD  STREET  JS  OFTEN  DULLt 

'  THE    GREAT    RISE    IN    THE  PRICE    OF    COMMODITIES, 

'  Most  persons  are  aware  that  the  trade  of  the 
country  is  in  a  state  of  great  activity.  All  the 
usual  tests  indicate  that — the  state  of  the  Revenue, 
the  Bankers'  Clearing-house  figures,  the  returns 
of  exports  and  imports  are  all  plain,  and  all  speak 
the  same  language.  But  few  have,  we  think, 
considered  one  most  remarkable  feature  of  the 
present  time,  or  have  sufficiently  examined  its 
consequences.  That  feature  is  the  great  rise  in 
the  price  of  most  of  the  leading  articles  of  trade 
during  the  past  year.  We  give  at  the  foot  of  this 
paper  a  list  of  articles,  comprising  most  first-rate 
articles  of  commerce,  and  it  will  be  seen  that  the 
rise  of  price,  though  not  universal  and  not  uniform, 
is  nevertheless  very  striking  and  very  general. 
The  most  remarkable  cases  are — 


January  December 

£    *.    d.  £    s.    d. 

Wool— South  Down  hogs        per  pack       13    o    o  21   15     o 

Cotton — Upland  ordinary       per  Ib.             ooyi-  o    o    8| 

No.  40  mule  yarn,  &c.              ,,                o     I     i|  012^ 

Iron— Bars,  British  .     .     .     per  ton            726  8  17    6 

Pig,  No.  i  Clyde  ...          „                 2  13     3  3  16    o 

Lead „               18    7    6  19    2    6 

Tin „             137    o    o  157    o    o 

Copper— Sheeting     ...          „               75  10    o  95     o    o 

Wheat  (GAZETTE  average)     per  qr.             2  12     o  2  15     8 


AND  SOMETIMES  EXCITED.  I41 

— and  in  other  cases  there  is  a  tendency  upwards 
in  price  much  more  often  than  there  is  a  tendency 
downwards. 

'  This  general  rise  of  price  must  be  due  either 
to  a  diminution  in  the  supply  of  the  quoted  articles, 
or  to  an  increased  demand  for  them.  In  some 
cases  there  has  no  doubt  been  a  short  supply. 
Thus  in  wool,  the  diminution  in  the  home  breed 
of  sheep  has  had  a  great  effect  on  the  price- 
in  1869  the  home  stock  of  sheep  was  .  .  .  29,538,000 

In  1871  „  „  „  ...  27,133,000 


Diminution 2,405,000 

Equal  to  8.1  per  cent. 

— and  in  the  case  of  some  other  articles  there 
may  be  a  similar  cause  operating.  But  taking 
the  whole  mass  of  the  supply  of  commodities  in 
this  country,  as  shown  by  the  plain  test  of  the 
quantities  imported,  it  has  not  diminished,  but 
augmented.  The  returns  of  the  Board  of  Trade 
prove  this  in  the  most  striking  manner,  and  we 
give  below  a  table  of  some  of  the  important 
articles.  The  rise  in  prices  must,  therefore,  be 
due  to  an  increased  demand,  and  the  first  question 
is,  to  what  is  that  demand  due  ? 

'  We  believe  it  to  be  due  to  the  combined 
operation  of  three  causes — cheap  money,  cheap 
corn,  and  improved  credit.  As  to  the  first  indeed, 


142       WHY  LOMBARD  STREET  IS   OFTEN  DULL, 

it  might  be  said  at  first  sight  that  so  general 
an  increase  must  be  due  to  a  depreciation  of  the 
precious  metals.  Certainly  in  many  controversies 
facts  far  less  striking  have  been  alleged  as  proving 
it.  And  indeed  there  plainly  is  a  diminution  in 
the  purchasing  power  of  money,  though  that  dimi- 
nution is  not  general  and  permanent,  but  local 
and  temporary.  The  peculiarity  of  the  precious 
metals  is  that  their  value  depends  for  unusually 
long  periods  on  the  quantity  of  them  which  is  in 
the  market.  In  the  long  run,  their  value,  like 
that  of  all  others,  is  determined  by  the  cost  at 
which  they  can  be  brought  to  market.  But  for 
all  temporary  purposes,  it  is  the  supply  in  the 
market  which  governs  the  price,  and  that  supply 
in  this  country  is  exceedingly  variable.  After  a 
commercial  crisis — 1866  for  example — two  things 
happen :  first,  we  call  in  the  debts  which  are 
owing  to  us  in  foreign  countries  ;  and  we  require 
these  debts  to  be  paid  to  us,  not  in  commodities, 
but  in  money.  From  this  cause  principally,  and 
omitting  minor  causes,  the  bullion  in  the  Bank  ol 
England,  which  was  I3,i56,ooo/.  in  May  1866, 
rose  to  I9,4i3,ooo/.  in  January  1867,  being  an 
increase  of  over  6,ooo,ooo/.  And  then  there 
comes  also  a  second  cause,  tending  in  the  same 
direction.  During  a  depressed  period  the  savings 


AND  SOMETIMES  EXCITED.  143 

of  the  country  increase  considerably  faster  than 
the  outlet  for  them.  A  person  who  has  made 
savings  does  not  know  what  to  do  with  them. 
And  this  new  unemployed  saving  means  addi- 
tional money.  Till  a  saving  is  invested  or 
employed  it  exists  only  in  the  form  of  money :  a 
farmer  who  has  sold  his  wheat  and  has  ioo/.  'to 
the  good/  holds  that  ioo/.  in  money,  or  some 
equivalent  for  money,  till  he  sees  some  advan- 
tageous use  to  be  made  of  it.  Probably  he  places 
it  in  a  bank,  and  this  enables  it  to  do  more  work. 
If  3,ooo,ooo/.  of  coin  be  deposited  in  a  bank,  and 
it  need  only  keep  i,ooo,ooo/.  as  a  reserve,  that 
sets  2,ooo,ooo/.  free,  and  is  for  the  time  equivalent 
to  an  increase  of  so  much  coin.  As  a  principle 
it  may  be  laid  down  that  all  new  unemployed 
savings  require  either  an  increased  stock  of  the 
precious  metals,  or  an  increase  in  the  efficie/vcy  of 
the  banking  expedients  by  which  these  metals  are 
economised.  In  other  words,  in  a  saving  and 
uninvesting  period  of  the  national  industry,  we 
accumulate  gold,  and  augment  the  efficiency  of 
our  gold.  If  therefore  such  a  saving  period 
follows  close  upon  an  occasion  when  foreign 
credits  have  been  diminished  and  foreign  debts 
called  in,  the  augmentation  in  the  effective 
quantity  of  gold  in  the  country  is  extremely  great. 


144       WHY  LOMBARD  STREET  IS   OFTEN  DULL, 

The  old  money  called  in  from  abroad  and  the  new 
money  representing  the  new  saving  co-operate 
with  one  another.  And  their  natural  tendency 
is  to  cause  a  general  rise  in  price,  and  what  is  the 
same  thing,  a  diffused  diminution  in  the  purchas- 
ing power  of  money. 

'  Up  to  this  point  there  is  nothing  special  in  the 
recent  history  of  the  money  market,  Similar 
events  happened  both  after  the  panic  of  1847,  and 
after  that  of  1857.  But  there  is  another  cause  of 
the  same  kind,  and  acting  in  the  same  direction, 
which  is  peculiar  to  the  present  time ;  this  cause 
is  the  amount  of  the  foreign  money,  and  especially 
of  the  money  of  foreign  Governments,  now  in 
London.  No  Government  probably  ever  had 
nearly  as  much  at  its  command  as  the  German 
Government  now  has.  Speaking  broadly,  two 
things  happened  :  during  the  war  England  was 
the  best  place  of  shelter  for  foreign  money,  and 
this  made  money  more  cheap  here  than  it  would 
otherwise  have  been  ;  after  the  war  England  be- 
came the  most  convenient  paying  place,  and  the 
most  convenient  resting  place  for  money,  and  this 
again  has  made  money  cheaper.  The  commercial 
causes,  for  which  there  are  many  precedents,  have 
been  aided  by  a  political  cause  for  the  efficacy  <\i 
which  there  is  no  precedent. 


AND  SOMETIMES  EXCITED.  145 

'But  though  plentiful  money  is  necessary  to 
high  prices,  and  though  it  has  a  natural  tendency 
to  produce  these  prices,  yet  it  is  not  of  itself  suffi- 
cient to  produce  them.  In  the  cases  we  are 
dealing  with,  in  order  to  lower  prices  there  must 
not  only  be  additional  money,  but  a  satisfactory 
mode  of  employing  that  additional  money.  This 
is  obvious  if  we  remember  whence  that  aug- 
mented money  is  derived.  It  is  derived  from  the 
savings  of  the  people,  and  will  only  be  invested  in 
the  manner  which  the  holders  for  the  time  being 
consider  suitable  to  such  savings.  It  will  not  be 
used  in  mere  expenditure ;  it  would  be  contrary 
to  the  very  nature  of  it  so  to  use  it.  A  new 
channel  of  demand  is  required  to  take  off  the  new 
money,  or  that  new  money  will  not  raise  prices. 
It  will  lie  idle  in  the  banks,  as  we  have  often  seen 
it.  We  should  still  see  the  frequent,  the  common 
phenomenon  of  dull  trade  and  cheap  money  exist- 
ing side  by  side. 

'  The  demand  in  this  case  arose  in  the  most 
effective  of  all  ways.  In  1867  and  the  first  half 
of  1868  corn  was  dear,  as  the  following  figures 
show : — 

7 


December,  1866     . 

j. 
.     .  60 

a. 
3 

October,     1867 

January,       1867     . 

.     .  61 

4 

November     ,, 

February         ,, 

.     .  60 

10 

December     ,, 

March              ,, 

.    .  59 

9 

January,  1868 

April                ,, 

.     .  61 

6 

February      ,, 

May                 „      . 

.     .  64 

8 

March           ,, 

June                „ 

.     .65 

4 

April              „ 

July              „     . 

.     .  65 

0 

May               „ 

August             ,, 

.     .  67 

8 

June              „ 

September      ,, 

.     .  62 

8 

j   y          » 

146       WHY  LOMBARD  STREET  IS  OFTEN  DULL, 

GAZETTE  AVERAGE  PRICE  OF  WHEAT. 

s.    <t. 

.  .  66    * 

.  .  69    5 

.  .  67    4 

•  •  70    3 

•  •  73    o 

•  •  73    a 

•  •  73     3 

•  •  73    9 
.  .  67  n 
.  .65     5 

From  that  time  it  fell,  and  it  was  very  cheap  during 
the  whole  of  1869  and  1870.  The  effect  of  this 
cheapness  is  great  in  every  department  of  indus- 
try. The  working  classes,  having  cheaper  food, 
need  to  spend  so  much  less  on  that  food,  and 
have  more  to  spend  on  other  things.  In  con- 
sequence, there  is  a  gentle  augmentation  of  de- 
mand through  almost  all  departments  of  trade. 
And  this  almost  always  causes  a  great  augmenta- 
tion in  what  may  be  called  the  instrumental  trades 
—that  is,  in  the  trades  which  deal  in  machines 
and  instruments  used  in  many  branches  of  com- 
merce,  and  in  the  materials  for  such.  Take,  for 
instance,  the  iron  trade — 

tons  tons 

In  the  year  1869  we  exported  .  .  2,568,000 
„     1870     ,,     .  .  2,716,000 

.  5,284,000 

„     1867     ,,     .  .  1,882,000 
„     1868     ,,     .  .  1,944,000 


Increase 


AND  SOMETIMES  EXCITED. 


147 


— that  is  to  say,  cheap  corn  operating  throughout 
the  world,  created  a  new  demand  for  many  kinds 
of  articles ;  the  production  of  a  large  number  of 
such  articles  being  aided  by  iron  in  some  one  of 
its  many  forms,  iron  to  that  extent  was  exported. 
And  the  effect  is  cumulative.  The  manufacture 
of  iron  being  stimulated,  all  persons  concerned  in 
that  great  manufacture  are  well  off,  have  more 
to  spend,  and  by  spending  it  encourage  other 
branches  of  manufacture,  which  again  propagate 
the  demand  ;  they  receive  and  so  encourage  in 
dustries  in  a  third  degree  dependent  and  removed. 

'  It  is  quite  true  that  corn  has  not  been  quite  so 
cheap  during  the  present  year.  But  even  if  it 
had  been  dearer  than  it  is,  it  would  not  all  at 
once  arrest  the  great  trade  which  former  cheap- 
ness had  created.  The  "  ball,"  if  we  may  so  say, 
"  was  set  rolling  "  in  1869  and  1870,  and  a  great 
increase  of  demand  was  then  created  in  certain 
trades  and  propagated  through  all  trades.  A 
continuance  of  very  high  prices  would  produce 
the  reverse  effect ;  it  would  slacken  demand  in 
certain  trades,  and  the  effect  would  be  gradually 
diffused  through  all  trades.  But  a  slight  rise 
such  as  that  of  this  year  has  no  perceptible  effect. 

'  When  the  stimulus  of  cheap  corn  is  added  to 
that  of  cheap  money,  the  full  conditions  of  a  great 


148       WHY  LOMBARD  STREET  IS   OFTEN  DULL, 

and  diffused  rise  of  prices  are  satisfied.  This 
new  employment  supplies  a  mode  in  which  money 
can  be  invested.  Bills  are  drawn  of  greater 
number  and  greater  magnitude,  and  through  the 
agencies  of  banks  and  discount  houses,  the  sav- 
ings of  the  country  are  invested  in  such  bills. 
There  is  thus  a  new  want  and  a  new  purchase- 
money  to  supply  that  want,  and  the  consequence 
is  the  diffused  and  remarkable  rise  of  price  which 
the  figures  show  to  have  occurred. 

'  The  rise  has  also  been  aided  by  the  revival  of 
credit.  This,  as  need  not  be  at  length  explained, 
is  a  great  aid  to  buying,  and  consequently  a  great 
aid  to  a  rise  of  price.  Since  1866,  credit  has 
been  gradually,  though  very  slowly,  recovering, 
and  it  is  probably  as  good  as  it  is  reasonable  or 
proper  that  it  should  be.  We  are  now  trusting 
as  many  people  as  we  ought  to  trust,  and  as  yet 
there  is  no  wild  excess  of  misplaced  confidence 
which  would  make  us  trust  those  whom  we  ought 
not  to  trust.' 

The  process  thus  explained  is  the  common 
process.  The  surplus  of  loanable  capital  which 
lies  in  the  hands  of  bankers  is  not  employed  by 
them  in  any  original  way  ;  it  is  almost  always  lent 
to  a  trade  already  growing  and  already  improving* 


AND  SOMETIMES  EXCITED. 

The  use  of  it  develops  that  trade  yet  farther,  and 
this  again  augments  and  stimulates  other  trades. 
Capital  may  long  lie  idle  in  a  stagnant  condition 
of  industry  ;  the  mercantile  securities  which  ex- 
perienced bankers  know  to  be  good  do  not  aug- 
ment, and  they  will  not  invent  other  securities,  or 
take  bad  ones. 

In  most  great  periods  of  expanding  industry, 
the  three  great  causes — much  loanable  capital, 
good  credit,  and  the  increased  profits  derived 
from  better-used  labour  and  better-used  capital — 
have  acted  simultaneously ;  and  though  either 
may  act  by  itself,  there  is  a  permanent  reason 
why  mostly  they  will  act  together.  They  both 
tend  to  grow  together,  if  you  begin  from  a  period 
of  depression.  In  such. periods  credit  is  bad,  and 
industry  unemployed  ;  very  generally  provisions 
are  high  in  price,  and  their  dearness  was  one  oi 
the  causes  which  made  the  times  bad.  Whether 
there  was  or  was  not  too  much  loanable  capital 
when  that  period  begins,  there  soon  comes  to  be 
too  much.  Quiet  people  continue  to  save  part  of 
their  incomes  in  bad  times  as  well  as  in  good; 
indeed,  of  the  two,  people  of  slightly-varying  and 
fixed  incomes  have  better  means  of  saving  in  bad 
times  because  prices  are  lower.  Quiescent  trade 
affords  no  new  securities  in  which  the  new  savirg 


150       WHY  LOMBARD  STREET  IS  OFTEN  DULL, 

can  be  invested,  and  therefore  there  comes  soon 
to  be  an  excess  of  loanable  capital.  In  a  year  or 
two  after  a  crisis  credit  usually  improves,  as  the 
remembrance  of  the  disasters  which  at  the  crisis 
impaired  credit  is  becoming  fainter  and  fainter. 
Provisions  get  back  to  their  usual  price,  or  some 
great  industry  makes,  from  some  temporary  cause, 
a  quick  step  forward.  At  these  moments,  there- 
fore, the  three  agencies  which,  as  has  been  ex- 
plained, greatly  develope  trade,  combine  to  de- 
velope  it  simultaneously. 

The  certain  result  is  a  bound  of  national 
prosperity  ;  the  country  leaps  forward  as  if  by 
magic.  But  only  part  of  that  prosperity  has  a 
solid  reason.  As  far  as  prosperity  is. based  on  a 
greater  quantity  of  production,  and  that  of  the 
right  articles — as  far  as  it  is  based  on  the  in- 
creased rapidity  with  which  commodities  of  every 
kind  reach  those  who  want  them — its  basis  is 
good.  Human  industry  is  more  efficient,  and 
therefore  there  is  more  to  be  divided  among  man- 
kind. But  in  so  far  as  that  prosperity  is  based  on 
a  general  rise  of  prices,  it  is  only  imaginary.  A 
general  rise  of  prices  is  a  rise  only  in  name; 
whatever  anyone  gains  on  the  article  which  he 
has  to  sell  he  loses  on  the  articles  which  he  has  to 
buy,  and  so  he  is  just  where  he  was.  The  only 


AND  SOMETIMES  EXCITED.  !$! 

real  effects  of  a  general  rise  of  prices  are  th  !se : 
first,  it  straitens  people  of  fixed  incomes,  who 
suffer  as  purchasers,  but  who  have  no  gain  to 
con  espond  ;  and  secondly,  it  gives  an  extra  profit 
to  fixed  capital  created  before  the  rise  happened 
Mere  the  sellers  gain,  but  without  any  equivalent, 
loss  as  buyers.  Thirdly,  this  gain  on  fixed 
capital  is  greatest  in  what  may  be  called  thr 
industrial  '  implements/  such  as  coal  and  iron. 
These  are  wanted  in  all  industries,  and  in  any 
general  increase  of  prices,  they  are  sure  to  rise 
much  more  than  other  things.  Everybody  wants 
them ;  the  supply  of  them  cannot  be  rapidly  aug- 
mented, and  therefore  their  price  rises  very 
quickly.  But  to  the  country  as  a  whole,  the 
general  rise  of  prices  is  no  benefit  at  all ;  it  is 
simply  a  change  of  nomenclature  for  an  identical 
relative  value  in  the  same  commodities.  Never- 
theless, most  people  are  happier  for  it ;  they 
think  they  are  getting  richer,  though  they  are 
not.  And  as  the  rise  does  not  happen  on  all 
articles  at  the  same  moment,  but  is  propagated 
gradually  through  society,  those  to  whom  it  first 
comes  gain  really ;  and  as  at  first  every  one  be- 
lieves that  he  will  gain  when  his  own  article  is 
rising,  a  buoyant  cheerfulness  overflows  the  mer- 
cantile world. 


LOMBARD   STREET  IS   OFTEN  DULL, 

This  prosperity  is  precarious  as  far  as  it  is  real4 
and  transitory  in  so  far  as  it  is  fictitious.  The 
augmented  production,  which  is  the  reason  of  the 
real  prosperity,  depends  on  the  full  working  oi 
the  whole  industrial  organisation — of  all  capitalists 
and  labourers  ;  that  prosperity  was  caused  by 
that  full  working,  and  will  cease  with  it.  But 
that  full  working  is  liable  to  be  destroyed  by  the 
occurrence  of  any  great  misfortune  to  any  con- 
siderable industry.  This  would  cause  misfortune 
to  the  industries  dependent  on  that  one,  and,  as 
has  been  explained,  all  through  society  and  back 
again.  But  every  such  industry  is  liable  to  grave 
fluctuations,  and  the  most  important — the  pro- 
vision-industries— to  the  gravest  and  the  sud- 
denest.  They  are  dependent  on  the  casualties  of 
the  seasons.  A  single  bad  harvest  diffused  ovei 
the  world,  a  succession  of  two  or  three  bad 
harvests,  even  in  England  only,  will  raise  the 
price  of  corn  exceedingly,  and  will  keep  it  high. 
And  a  great  and  protracted  rise  in  the  price  of 
corn  will  at  once  destroy  all  the  real  part  of  the 
unusual  prosperity  of  previous  good  times.  It 
will  change  the  full  working  of  the  industrial 
machine  into  an  imperfect  working ;  it  will  make 
the  produce  of  that  machine  less  than  usual  in- 
stead of  more  than  usual ;  instead  of  there  beim* 


AND  SOMETIMES  EXCITED.  153 

more  than  the  average  of  general  dividend  to  be 
distributed  between  the  producers,  there  will 
immediately  be  less  than  the  average. 

And  in  so  far  as  the  apparent  prosperity  is 
caused  by  an  unusual  plentifulness  of  loanable 
capital  and  a  consequent  rise  in  prices,  that 
prosperity  is*  not  only  liable  to  reaction,  but 
certain  to  be  exposed  to  reaction.  The  same 
causes  which  generate  this  prosperity  will,  after 
they  have  been  acting  a  little  longer,  generate  an 
equivalent  adversity.  The  process  is  this  :  the 
plentifulness  of  loanable  capital  causes  a  rise  of 
prices  ;  that  rise  of  prices  makes  it  necessary  to 
have  more  loanable  capital  to  carry  on  the  same 
trade.  ioo,ooo/.  will  not  buy  as  much  when 
prices  are  high  as  it  will  when  prices  are  low,  it 
will  not  be  so  effectual  for  carrying  on  business  ; 
more  money  is  necessary  in  dear  times  than  in 
cheap  times  to  produce  the  same  changes  in  the 
same  commodities.  Even  supposing  trade  to 
have  remained  stationary,  a  greater  capital  would 
be  required  to  carry  it  on  after  such  a  rise  of 
prices  as  has  been  described  than  was  necessary 
before  that  rise.  But  in  this  case  the  trade  will 
not  have  remained  stationary  ;  it  will  have  in- 
creased— certainly  to  some  extent,  probably  to  a 

great  extent.     The  'loanable  capital,'  the  lending 
7* 


154       WHY  LOMBARD  STREET  IS   OFTEN  DULL, 

of  which  caused  the  rise  of  prices,  was  lent  to 
enable  it  to  augment.  The  loanable  capital  lay 
idle  in  the  banks  till  some  trade  started  into  pros- 
perity, and  then  was  lent  in  order  to  develope  that 
trade ;  that  trade  caused  other  secondary  de- 
velopments ;  those  secondary  developments  en- 
abled more  loanable  capital  to  be  tent ;  and  that 
lending  caused  a  tertiary  development  of  trade  ; 
and  so  on  through  society. 

In  consequence,  a  long-continued  low  rate  of 
interest  is  almost  always  followed  by  a  rapid  rise 
in  that  rate.  Till  the  available  trade  is  found  it 
lies  idle,  and  can  scarcely  be  lent  at  all ;  some  of 
it  is  not  lent.  But  the  moment  the  available  trade 
is  discovered — the  moment  that  prices  have  risen 
—the  demand  for  loanable  capital  becomes  keen. 
For  the  most  part,  men  of  business  must  carry  on 
their  regular  trade ;  if  it  cannot  be  carried  on 
without  borrowing  10  per  cent,  more  capital,  10 
per  cent,  more  capital  they  must  borrow.  Very 
often  they  have  incurred  obligations  which  must 
be  met ;  and  if  that  is  so  the  rate  of  interest  which 
they  pay  is  comparatively  indifferent.  What  is 
necessary  to  meet  their  acceptances  they  will 
borrow,  pay  for  it  what  they  may  ;  they  had  better 
pay  any  price  than  permit  those  acceptances  to  be 
dishonoured.  And  in  less  extreme  cases  men  of 


AND  SOMETIMES  EXCITED.  \  55 

business  have  a  fixed  capital,  which  cannot  lie 
idle  except  at  a  great  loss  ;  a  set  of  labourers  which 
must  be,  if  possible,  kept  together  ;  a  steady  con- 
nection of  customers,  which  they  would  very  un- 
willingly lose.  To  keep  all  these,  they  borrow  ; 
and  in  a  period  of  high  prices  many  merchants  are 
peculiarly  anxious  to  borrow,  because  the  augmen- 
tation of  the  price  of  the  article  in  which  they  deal 
makes  them  really  see,  or  imagine  that  they  see, 
peculiar  opportunities  of  profit.  An  immense  new 
borrowing  soon  follows  upon  the  new  and  great 
trade,  and  the  rate  of  interest  rises  at  once,  and 
generally  rises  rapidly. 

This  is  the  surer  to  happen  that  Lombard  Street 
is,  as  has  been  shown  before,  a  very  delicate 
market.  A  large  amount  of  money  is  held  there 
by  bankers  and  by  bill-brokers  at  interest :  this  they 
must  employ,  or  they  will  be  ruined.  It  is  better 
for  them  to  reduce  the  rate  they  charge,  and  com- 
pensate themselves  by  reducing  the  rate  they  pay, 
rather  than  to  keep  up  the  rate  of  charge,  if  by  so 
doing  they  cannot  employ  all  their  money.  It  is 
vital  to  them  to  employ  all  the  money  on  which 
they  pay  interest.  A  little  excess  therefore  forces 
down  the  rate  of  interest  very  much.  But  if  that 
low  rate  of  interest  should  cause,  or  should  aid  in 
causing,  a  great  growth  of  trade,  the  rise  is  sure  to 


156       WJ/y  LOMBARD   STREET  IS   OFTEN  DULL, 

be  quick,  and  is  apt  to  be  violent.  The  figures  of 
trade  are  reckoned  by  hundreds  of  millions,  where 
those  of  loanable  capital  count  only  by  millions. 
A  great  increase  in  the  borrowing  demands  of 
English  commerce  almost  always  changes  an  excess 
of  loanable  capital  above  the  demand  to  a  greater 
deficiency  below  the  demand.  That  deficiency 
causes  adversity,  or  apparent  adversity,  in  trade, 
just  as,  and  in  the  same  manner,  that  the  previous 
excess  caused  prosperity,  or  apparent  prosperity. 
It  causes  a  fall  of  price  that  runs  through  society ; 
that  fall  causes  a  decline  of  activity  and  a  diminu- 
tion of  profits — a  painful  contraction  instead  of  the 
'previous  pleasant  expansion. 

The  change  is  generally  quicker  because  some 
check  to  credit  happens  at  an  early  stage  of  it. 
The  mercantile  community  will  have  been  unusu- 
ally fortunate  if  during  the  period  of  rising  prices 
it  has  not  made  great  mistakes.  Such  a  period 
naturally  excites  the  sanguine  and  the  ardent;  they 
fancy  that  the  prosperity  they  see  will  last 
always,  that  it  is  only  the  beginning  of  a  greater 
prosperity.  They  altogether  over-estimate  the 
demand  for  the  article  they  deal  in,  or  the  work 
they  do.  They  all  in  their  degree— and  the  ablest 
and  the  cleverest  the  most — work  much  more 
than  the)-  should,  and  trade  far  above  their 


AND  SOMETIMES  EXCITED. 


157 


means.  Every  great  crisis  reveals  the  excessive 
speculations  of  many  houses  which  no  one  before 
suspected,  and  which  commonly  indeed  had  not 
begun  or  had  not  carried  very  far  those  specula- 
tions, till  they  were  tempted  by  the  daily  rise  of 
price  and  the  surrounding  fever. 

The  case  is  worse,  because  at  most  periods  of 
great  commercial  excitement  there  is  some  mixture 
of  the  older  and  simpler  kind  of  investing  mania, 
Though  the  money  of  saving  persons  is  in  the 
hands  of  banks,  and  though,  by  offering  interest, 
banks  retain  the  command  of  much  of  it,  yet  they 
do  not  retain  the  command  of  the  whole,  or  any- 
thing near  the  whole  ;  all  of  it  can  be  used,  and 
much  of  it  is  used,  by  its  owners.  They  speculate 
with  it  in  bubble  companies  and  in  worthless 
shares,  just  as  they  did  in  the  time  of  the  South 
Sea  mania,  when  there  were  no  banks,  and  as 
they  would  again  in  England  supposing  that 
banks  ceased  to  exist.  The  mania  of  1825 
and  the  mania  of  1866  were  striking  examples 
of  this ;  jn  their  case  to  a  great  extent,  as  in 
most  similar  modern  periods  to  a  less  extent, 
the  delirium  of  ancient  gambling  co-operated  with 
the  milder  madness  of  modern  overtrading.  At 
the  very  beginning  of  adversity,  the  counters  in 
the  gambling  mania,  the  shades  in  the  companies 


It; 8       WHY  LOMBARD   STREET     S   OFTEN  DULL. 

created  to  feed  the  mania,  are  discovered  to  be 
worthless  ;  down  they  all  go,  and  with  them  much 
of  credit. 

The  good  times  too  of  high  price  almost  always 
engender  much  fraud.  All  people  are  most  credu- 
lous when  they  are  most  happy  ;  and  when  much 
money  has  just  been  made,  when  some  people  are 
really  making  it,  when  most  people  think  they  are 
making  it,  there  is  a  happy  opportunity  for  ingeni- 
ous mendacity.  Almost  everything  will  be  believed 
for  a  little  while,  and  long  before  discovery  the 
worst  and  most  adroit  deceivers  are  geographically 
or  legally  beyond  the  reach  of  punishment.  But 
the  harm  they  have  done  diffuses  harm,  for  it 
weakens  credit  still  farther. 

When  we  understand  that  Lombard  Street  is 
subject  to  severe  alternations  of  opposite  causes, 
we  should  cease  to  be  surprised  at  its  seeming 
cycles.  We  should  cease  too  to  be  surprised  at 
the  sudden  panics.  During  the  period  of  reaction 
and  adversity,  just  even  at  the  last  instant  of 
prosperity,  the  whole  structure  is  delicate.  The 
peculiar  essence  of  our  banking  system  is  an 
unprecedented  trust  between  man  and  man  :  and 
when  that  trust  is  much  weakened  by  hidden 
causes,  a  small  accident  may  greatly  hurt  it, 


AND  SOMETIMES  EXCITED. 

and  a  great  accident  for  a  moment  ma}-  almost 
destroy  it. 

Now  too  that  we  comprehend  the  inevitable 
vicissitudes  of  Lombard  Street,  we  can  also 
thoroughly  comprehend  the  cardinal  importance 
of  always  retaining  a  great  banking  reserve. 
Whether  the  times  of  adversity  are  well  met  or 
ill  met  depends  far  more  on  this  than  on  any 
other  single  circumstance.  If  the  reserve  be 
large,  its  magnitude  sustains  credit ;  and  if  it  be 
small,  its  diminution  stimulates  the  gravest  appre- 
hensions. And  the  better  we  comprehend  the 
importance  of  the  banking  reserve,  the  higher  we 
shall  estimate  the  responsibility  of  those  who 
keep  it 


CHAPTER    VII. 

A  MORE  EXACT  ACCOUNT  OF  r,  HE  MODE  IN  WHICH 
THE  BANK  OF  ENGLAND  HAS  DISCHARGED  ITS 
DUTY  OF  RETAINING  A  GOOD  BANK  RESERVE,  AND 
OF  ADMINISTERING  IT  EFFECTUALLY. 

THE  preceding  chapters  have  in  some  degree 
enabled  us  to  appreciate  the  importance  of  the 
duties  which  the  Bank  of  England  is  bound  to 
discharge  as  to  its  banking  reserve. 

If  we  ask  how  the  Bank  of  England  has  dis- 
charged this  great  responsibility,  we  shall  be 
struck  by  three  things  :  first,  as  has  been  said 
before,  the  Bank  has  never  by  any  corporate  act 
or  authorised  utterance  acknowledged  the  duty, 
and  some  of  its  directors  deny  it ;  second  (what 
is  even  more  remarkable),  no  resolution  of  Par- 
liament, no  report  of  any  Committee  of  Parlia- 
ment (as  far  as  I.  know),  no  remembered  speech 
of  a  responsible  statesman,  has  assigned  or 
enforced  that  duty  on  the  Bank  ;  third  (what  is 


OF   THE  RESERVE.  l6l 

more  remarkable  still),  the  distinct  teaching  of 
our  highest  authorities  has  often  been  that  no 
public  duty  of  any  kind  is  imposed  on  the  Banking 
Department  of  the  Bank ;  that,  for  banking 
purposes,  it  is  only  a  joint  stock  bank  like  any 
other  bank  ;  that  its  managers  should  look  only 
to  the  interest  of  the  proprietors  and  their  divi- 
dend ;  that  they  are  to  manage  as  the  London  and 
Westminster  Bank  or  the  Union  Bank  manages. 

At  first,  it  seems  exceedingly  strange  that  so 
important  a  responsibility  should  be  unimposed, 
unacknowledged,  and  denied  ;  but  the  explanation 
is  this.  We  are  living  amid  the  vestiges  of  old 
controversies,  and  we  speak  their  language,  though 
we  are  dealing  with  different  thoughts  and  differ- 
ent facts.  For  more  than  fifty  years — from  1 793 
down  to  1844 — there  was  a  keen  controversy  as 
to  the  public  duties  of  the  Bank.  It  was  said  to 
be  the  '  manager '  of  the  paper  currency,  and  on 
that  account  many  expected  much  good  from  it ; 
others  said  it  did  great  harm  ;  others  again  that 
it  could  do  neither  good  nor  harm.  But"  for  the 
whole  period  there  was  an  incessant  and  fierce 
discussion.  That  discussion  was  terminated  by 
the  Act  of  1844.  By  that  Act  the  currency 
manages  itself;  the  entire  working  is  automatic. 
The  Bank  of  England  plainly  does  not  manage — 


lC2  THE  BANK'S  ADMINISTRATION 

cannot  even  be  said  to  manage — the  currency  any 
more>  And  naturally,  but  rashly,  the  only  reason 
L'pon  which  a  public  responsibility  used  to  be 
assigned  to  the  Bank  having  now  clearly  come  to 
an  end,  it  was  inferred  by  many  that  the  Bank  had 
no  responsibility. 

The  complete  uncertainty  as  to  the  degree  of 
responsibility  acknowledged  by  the  Bank  of  Eng- 
land is  best  illustrated  by  what  has  been  said  by 
the  Bank  directors  themselves  as  to  the  panic  of 
1866.  The  panic  of  that  year,  it  will  be  remem- 
bered, happened,  contrary  to  precedent,  in  the 
spring,  and  at  the  next  meeting  of  the  Court  of 
Bank  proprietors — the  September  meeting — there 
was  a  very  remarkable  discussion,  which  I  give  at 
length  below,*  and  of  which  all  that  is  most  mate- 
rial was  thus  described  in  the  '  Economist '  :— 

'  THE  GREAT  IMPORTANCE  OF  THE  LATE  MEETING 
OF  THE  PROPRIETORS  OF  THE  BANK  OF  ENGLAND. 

'  The  late  meeting  of  the  proprietors  of  the 
Bank  of  England  has  a  very  unusual  importance. 
There  can  be  no  effectual  inquiry  now  into  the 
history  of  the  late  crisis.  A  Parliamentary 
committee  next  year  would,  unless  something 
strange  occur  in  the  interval,  be  a  great  waste  ol 
time.  Men  of  business  have  keen  sensations  hut 

*  See  Note  D  in  the  Appendix. 


OF   THE  RESERVE.  163 

short  memories,  and  they  will  care  no  more  next 
February  for  the  events  of  last  May  than  they 
now  care  for  the  events  of  October  1864.  A 
pro  forma  inquiry,  on  which  no  real  mind  is  spent, 
and  which  everyone  knows  will  lead  to  nothing, 
is  far  worse  than  no  inquiry  at  all.  Under  these 
circumstances  the  official  statements  of  the 
Governor  of  the  Bank  are  the  only  authentic 
expositions  we  shall  have  of  the  policy  of  the 
Bank  Directors,  whether  as  respects  the  past  or 
the  future.  And  when  we  examine  the  proceed- 
ings with  care,  we  shall  find  that  they  contain 
matter  of  the  gravest  import. 

'  This  meeting  may  be  considered  to  admit  and 
recognise  the  fact  that  the  Bank  of  England 
keeps  the  sole  banking  reserve  of  the  country. 
We  do  not  now  mix  up  this  matter  with  the 
country  circulation,  or  the  question  whether  there 
should  be  many  issuers  of  notes  or  only  one.  We 
speak  not  of  the  currency  reserve,  but  of  the  bank- 
ing reserve — the  reserve  held  against  deposits, 
and  not  the  reserve  held  against  notes.  We  have 
often  insisted  in  these  columns  that  the  Bank  of 
England  does  keep  the  sole  real  reserve — the  sole 
considerable  unoccupied  mass  of  cash  in  the 
country  ;  but  there  has  been  no  universal  agree- 
ment about  it.  Great  authorities  have  been 


1 64  THE  BANK'S  ADMINISTRATION 

unwilling  to  admit  it.  They  have  not,  indeed, 
formally  and  explicitly  contended  against  it.  H 
they  had,  they  must  have  pointed  out  some  other 
great  store  of  unused  cash  besides  that  at  the 
Bank,  and  they  could  not  find  such  store.  But 
they  have  attempted  distinctions  ; — have  said  that 
the  doctrine  that  the  Bank  of  England  keeps 
the  sole  banking  reserve  of  the  country  was  "  not 
a  good  way  of  putting  it,"  was  exaggerated,  and 
was  calculated  to  mislead. 

'  But  the  late  meeting  is  a  complete  admission 
that  such  is  the  fact.  The  Governor  of  the  Bank 
said  : — 

' "  A  great  strain  has  within  the  last  few  months 
been  put  upon  the  resources  of  this  house,  and  of 
the  whole  banking  community  of  London  ;  and  I 
think  I  am  entitled  to  say  that  not  only  this  house, 
but  the  entire  banking  body,  acquitted  themselves 
most  honourably  and  creditably  throughout  that 
very  trying  period.  Banking  is  a  very  peculiar 
business,  and  it  depends  so  much  upon  credit  that 
the  least  blast  of  suspicion  is  sufficient  to  sweep 
away,  as  it  were,  the  harvest  of  a  whole  year. 
But  the  manner  in  which  the  banking  establish- 
ments generally  in  London  met  the  demands 
made  upon  them  during  the  greater  portion  of  the 
past  half-year  affords  a  most  satisfactory  proof  of 


OF   THE  RESERVE.  165 

the  soundness  of  the  principles  on  which  their 
business  is  conducted.  This  house  exerted  itself 
to  the  utmost — and  exerted  itself  most  success- 
fully— to  meet  the  crisis.  We  did  not  flinch 
from  our  post.  When  the  storm  came  upor 
us,  on  the  morning  on  which  it  became  known 
that  the  house  of  Overend  and  Co.  had  failed,  we 
were  in  as  sound  and  healthy  a  position  as  any 
banking  establishment  could  hold,  and  on  that  day 
and  throughout  the  succeeding  week  we  made 
advances  which  would  hardly  be  credited.  I  do 
not  believe  that  anyone  would  have  thought  ol 
predicting,  even  at  the  shortest  period  beforehand, 
the  greatness  of  those  advances.  It  was  not  un- 
natural that  in  this  state  of  things  a  certain  degree 
of  alarm  should  have  taken  possession  of  the 
public  mind,  and  that  those  who  required  accom- 
modation from  the  Bank  should  have  gone  to  the 
Chancellor  of  the  Exchequer  and  requested  the 
Government  to  empower  us  to  issue  notes  beyond 
the  statutory  amount,  if  we  should  think  that  such 
a  measure  was  desirable.  But  we  had  to  act 
before  we  could  receive  any  such  power,  and 
before  the  Chancellor  of  the  Exchequer  was 
perhaps  out  of  his  bed  we  had  advanced  one-half 
of  our  reserves,  which  were  certainly  thus  reduced 
to  an  amount  which  we  could  not  witness  without 


166  THE  BANK'S  ADMINISTRATION 

regret.  But  we  would  not  flinch  from  the  duty  which 
we  conceived  was  imposed  upon  us  of  supporting 
the  banking  community,  and  I  am  not.  aware  that 
any  legitimate  application  made  for  assistance  to 
this  house  was  refused.  Every  gentleman  who 
came  here  with  adequate  security  was  liberally 
dealt  with,  and  if  accommodation  could  not  be 
afforded  to  the  full  extent  which  was  demanded, 
no  one  who  offered  proper  security  failed  to  obtain 
relief  from  this  house." 

'  Now  this  is  distinctly  saying  that  the  other 
banks  of  the  country  need  not  keep  any  such 
banking  reserve — any  such  sum  of  actual  cash — of 
real  sovereigns  and  bank  notes,  as  will  help  them 
through  a  sudden  panic.  It  acknowledges  a 
"  duty  "  on  the  part  of  the  Bank  of  England  to 
"  support  the  banking  community,"  to  make  the 
reserve  of  the  Bank  of  England  do  for  them  as 
well  as  for  itself. 

'  In  our  judgment  this  language  is  most  just, 
and  the  Governor  of  the  Bank  could  scarcely  have 
done  a  greater  public  service  than  by  using 
language  so  businesslike  and  so  distinct.  Let  us 
know  precisely  who  is  to  keep  the  banking  reserve 
If  the  joint  stock  banks  and  the  private  banks  and 
the  country  banks  are  to  keep  their  share,  let  us 
determine  on  that ;  Mr.  Gladstone  appeared  not 


OF   THE  RESERVE.  ify 

long  since  to  say  in  Parliament  that  it  ought  to  be 
so.  But  at  any  rate  there  should  be  no  doubt 
whose  duty  it  is.  Upon  grounds  which  we  have 
often  stated,  we  believe  that  the  anomaly  of  one 
bank  keeping  the  sole  banking  reserve  is  so  fixecl 
in  our  system  that  we  cannot  change  it  if  we  would. 
The  great  evil  to  be  feared  was  an  indistinct  con- 
ception of  the  fact,  and  that  is  now  avoided. 

'  The  importance  of  these  declarations  by  the 
Bank  is  greater,  because  after  the  panic  of  1857 
the  bank  did  not  hold  exactly  the  same  language. 
A  person  who  loves  concise  expressions  said  lately 
"  that  Overends  broke  the  Bank  in  1866  because; 
it  went,  and  in  1857  because  it  was  not  let  go." 
We  need  not  too  precisely  examine  such  language ; 
the  element  of  truth  in  it  is  very  plain — the  gieat 
advances  made  to  Overends  were  a  principal 
event  in  the  panic  of  1857  ;  the  bill-brokers  were 
then  very  much  what  the  bankers  were  lately— 
they  were  the  borrowers  who  wanted  sudden  and 
incalculable  advances.  But  the  bill-brokers  were 
told  not  to  expect  the  like  again.  But  Alderman 
Salomons,  on  the  part  of  the  London  bankers, 
said,  "  he  wished  to  take  that  opportunity  of  stating 
that  he  believed  nothing  could  be  more  satisfactory 
to  the  managers  and  shareholders  of  joint  stock 
banks  than  the  testimony  which  the  Governor  of 


168  THE  BANK'S  ADMINISTRATION 

the  Bank  of  England  had  that  day  borne  to  the 
sound  and  honourable  manner  in  which  their 
business  was  conducted.  It  was  manifestly 
desirable  that  the  joint  stock  banks  and  the  bank- 
ing interest  generally  should  work  in  harmony 
with  the  Bank  of  England ;  and  he  sincerely 
thanked  the  Governor  of  the  Bank  for  the  kindly 
manner  in  which  he  had  alluded  to  the  mode  in 
which  the  joint  stock  banks  had  met  the  late 
monetary  crisis."  The  B?.nk  of  England  agrees 
to  give  other  banks  the  requisite  assistance  in  case 
of  need,  and  the  other  banks  agree  to  ask  for  it. 

'  Secondly.  The  Bank  agrees,  in  fact,  if  not  in 
name,  to  make  unlimited  advances  on  proper 
security  to  anyone  who  applies  for  it.  On  the 
present  occasion  45,ooo,ooo/.  was  so  advanced  in 
three  months.  And  the  Bank  dotfnot  say  to  the 
mercantile  community,  or  to  the  bankers,  "  Do 
not  come  to  us  again.  We  helped  you  once.  But 
do  not  look  upon  it  as  a  precedent.  We  will  not 
help  you  again."  On  the  contrary,  the  evident 
and  intended  implication  is  that  under  like  cir- 
cumstances the  Bank  would  act  again  as  it  has 
now  acted.' 

This  article  was  much  disliked  by  many  of  the 
Bank  directors,  and  especially  by  some  whose 
opinion  is  of  great  authority.  They  thought 


OF   THE  RESERVE. 

that  the  '  Economist '  drew  *  rash  deductions 
from  a  speech  which  was  in  itself  '  open  to 
some  objection ' — which  was,  like  all  such 
speeches,  defective  in  theoretical  precision,  and 
which  was  at  best  only  the  expression  of  ai: 
opinion  by  the  Governor  of  that  day,  which  had 
not  been  authorised  by  the  Court  of  Directors, 
which  could  not  bind  the  Bank.  However  the 
article  had  at  least  this  use,  that  it  brought  out  the 
facts.  All  the  directors  would  have  felt  a  difficulty  in 
commenting  upon,  or  limiting,  or  in  differing  from, 
a  speech  of  a  Governor  from  the  chair.  But  there 
was  no  difficulty  or  delicacy  in  attacking  the 
1  Economist/  Accordingly  Mr.  Hankey,  one  of 
the  most  experienced  bank  directors,  not  long  after, 
took  occasion  to  observe  : — 

*  The  "Economist"  newspaper  has  put  forth  what 
in  my  opinion  is  the  most  mischievous  doctrine 
ever  broached  in  the  monetary  or  banking  world 
in  this  country  ;  viz.  that  it  is  the  proper  function  of 
the  Bank  of  England  to  keep  money  available  at 
all  times  to  supply  the  demands  of  bankers  who  have 
rendered  their  own  assets  unavailable.  Until  such 
a  doctrine  is  repudiated  by  the  banking  interest, 
the  difficulty  of  pursuing  any  sound  principle  of 
banking  in  London  will  be  always  very  great. 

But  I  do  not  believe  that  such  a  doctrine  as  that 
R 


THE  BANK^S  ADMINISTRATION 

bankers  are  justified  in  relying  on  the  Bank  of 
England  to  assist  them  in  time  of  need  is  generally 
held  by  the  bankers  in  London. 

'  I  consider  it  to  be  the  undoubted  duty  of  the 
Bank  of  England  to  hold  its  banking  deposits 
(reserving  generally  about  one-third  in  cash)  in 
the  most  available  securities  ;  and  in  the  event  of 
a  sudden  pressure  in  the  money  market,  by  what- 
ever circumstance  it  may  be  caused,  to  bear  its  full 
share  of  a  drain  on  its  resources.  I  am  ready  to 
admit,  however,  that  a  general  opinion  has  long 
prevailed  that  the  Bank  of  England  ought  to  be 
prepared  to  do  much  more  than  this,  though  I 
confess  my  surprise  at  finding  an  advocate  for  such 
an  opinion  in  the  "  Economist."*  If  it  were  practi- 
cable for  the  Bank  to  retain  money  unemployed  to 
meet  such  an  emergency,  it  would  be  a  very  un- 
wise thing  to  do  so.  But  I  contend  that  it  is  quite 
impracticable,  and  if  it  were  possible,  it  would  be 
most  inexpedient ;  and  I  can  only  express  my  regret 
that  the  Bank,  from  a  desire  to  do  everything  in 
its  power  to  afford  general  assistance  in  times  of 
banking  or  commercial  distress,  should  ever  have 
acted  in  a  way  to  encourage  such  an  opinion.  The 
more  the  conduct  of  the  affairs  of  the  Bank  is  made 
to  assimilate  to  the  conduct  of  every  other  well- 
*  Vide  Economist  of  September  22,  1866. 


OF    THE  RESERVE.  \f\ 

managed  bank  in  the  United  Kingdom,  the  better 
for  the  Bank,  and  the  better  for  the  community  at 
large.' 

I  am  scarcely  a  judge,  but  I  do  not  think  Mr. 
ilankey  replies  to  the  'Economist'  very  con- 
clusively. 

First.  He  should  have  observed  that  the  ques- 
tion is  not  as  to  what  'ought  to  be/  but  as  to  what 
JS*-  The  '  Economist '  duTnotsay  that  the  system 
of  a  single  bank  reserve  was  a  good  system,  but 
that  it  was  the  system  which  existed,  and  which 
must  be  worked,  as  you  could  not  change  it. 

Secondly.  Mr.  Hankey  should  have  shown 
'  some  other  store  of  unused  cash  '  except  the 
reserve  in  the  Banking  Department  of  the  Bank  of 
England  out  of  which  advances  in  time  of  panic 
could  be  made.  These  advances  are  necessary, 
and  must  be  made  by  someone.  The  '  reserves ' 
of  London  bankers  are  no\  such  store  ;  they  are 
used  cash,  not  unused  ;  they  are  part  of  the  Bank 
deposits,  and  lent  as  such. 

Thirdly.  Mr.  Hankey  should  have  observed 
that  we  know  by  the  published  figures  that  the 
joint  stock  banks  of  London  do  not  keep  one-third, 
or  anything  like  one-third,  of  their  liabilities  in 
'  cash' — even  meaning  by  '  cash  '  a  deposit  at  the 
Bank  of  England.  One-third  of  the  deposits  in 


Ij2  THE   BANK'S  ADMINISTRATION 

joint  stock  banks,  not  to  speak  of  the  private 
banks,  would  be  3O,ooo,ooo/.  ;  and  the  private 
deposits  of  the  Bank  of  England  are  i8,ooo,ooo/. 
According  to  his  own  statement,  there  is  a  con- 
spicuous contrast.  The  joint  stock  banks,  and  the 
private  banks,  no  doubt,  too,  keep  one  sort  oi 
reserve,  and  the  Bank  of  England  a  different  kind 
of  reserve  altogether.  Mr.  Hankey  says  that  the 
two  ought  to  be  managed  on  the  same  principle  ; 
but  if  so,  he  should  have  said  whether  he  would 
assimilate  the  practice  of  the  Bank  of  England  to 
that  of  the  other  banks,  or  that  of  the  other  banks 
to  the  practice  of  the  Bank  of  England. 

Fourthly.  Mr.  Hankey  should  have  observed 
that,  as  has  been  explained,  in  most  panics,  the 
principal  use  of  a  '  banking  reserve '  is  not  to 
advance  to  bankers  ;  the  largest  amount  is  almost 
always  advanced  to  the  mercantile  public  and  to 
bill-brokers.  But  the  point  is,  that  by  our  system 
all  extra  pressure  is  thrown  upon  the  Bank  of 
England.  In  the  worst  part  of  the  crisis  of  1866, 
5O,ooo/.  '  fresh  money  '  could  not  be  borrowed, 
even  on  the  best  security — even  on  Consols— 
except  at  the  Bank  of  England.  There  was  nc 
other  lender  to  new  borrowers. 

But  my  object   now  is    not   to    revive    a  past 
controversy,  but  to  show  in  what  an  unsatisfactory 


OF   THE  RESERVE. 


'73 


and  uncertain  condition  that  controversy  has  left 
a  most  important  subject.  Mr.  Hankey's  is  the 
last  explanation  we  have  had  of  the  policy  of 
the  Bank.  He  is  a  very  experienced  and 
attentive  director,  and  I  think  expresses,  more 
or  less,  the  opinions  of  other  directors.  And  what 
do  we  find  ?  Setting  aside  and  saying  nothing 
about  the  remarkable  speech  of  the  Governor  in 
1866,  which  at  least  (according  to  the  interpretation 
of  the  '  Economist ')  was  clear  and  excellent,  Mr. 
Hankey  leaves  us  in  doubt  altogether  as  to  what 
will  be  the  policy  of  the  Bank  of  England  in  the 
next  panic,  and  as  to  what  amount  of  aid  the  pub- 
lic may  then  expect  from  it.  His  words  are  too 
vague.  No  one  can  tell  what  a  '  fair  share '  means  ; 
still  less  can  we  tell  what  other  people  at  some  future 
time  will  say  it  means.  Theory  suggests,  and  ex 
perience  proves,  that  in  a  panic  the  holders  of  the 
ultimate  Bank  reserve  (whether  one  bank  or  many) 
should  lend  to  all  that  bring  good  securities  quickly, 
freely,  and  readily.  By  that  policy  they  allay  a 
panic ;  by  every  other  policy  they  intensify  it.  The 
public  have  a  right  to  know  whether  the  Bank  of 
England — the  holders  of  our  ultimate  bank  re- 
serve—acknowledge this  duty,  and  are  ready  to 
pe.rform  it.  But  this  is  now  very  uncertain. 
If  we  refer  to  history,  and  examine  what  in 


174  THE   BANK'S  ADMINISTRATION 

fact  has  been  the  conduct  of  the  Bank  directors, 
we  find  that  they  have  acted  exactly  as  persons 
of  their  type,  character,  and  position  might  ha\  e 
been  expected  to  act.  They  are  a  board  ol 
plain,  sensible,  prosperous  English  .  merchants  ; 
and  they  have  both  done  and  left  undone  what 
such  a  board  might  have  been  expected  to 
do  and  not  to  do.  Nobody  could  expect  great 
attainments  in  economical  science  from  such  a 
board ;  laborious  study  is  for  the  most  part 
foreign  to  the  habits  of  English  merchants.  Nor 
could  we  expect  original  views  on  banking,  for 
banking  is  a  special  trade,  and  English  merchants, 
as  a  body,  have  had  no  experience  in  it.  A 
'  board '  can  scarcely  ever  make  improvements, 
for  the  policy  of  a  board  is  determined  by  the 
opinions  of  the  most  numerous  class  of  its  mem- 
bers— its  average  members — and  these  are  never 
prepared  for  sudden  improvements.  A  board  of 
upright  and  sensible  merchants  will  always  act 
according  to  what  it  considers  '  safe  '  principles— 
that  is,  according  to  the  received  maxims  of  the 
mercantile  world  then  and  there — and  in  this 
manner  the  directors  of  the  Bank  of  England  have 
acted  nearly  uniformly. 

Their  strength  and  their  weakness  were  curiously 
exemplified  at  the  time  when  they  had  the  most 


OF   THE  RESERVE.  \J$ 

power.  After  the  suspension  of  cash  payments 
in  1797,  the  directors  of  the  Bank  of  England 
could  issue  what  notes  they  liked.  There  was  no 
check  ;  these  notes  could  not  come  back  upon  the 
Bank  for  payment ;  there  was  a  great  temptation  to 
extravagant  issue,  and  no  present  penalty  upon  it. 
But  the  directors  of  the  Bank  withstood  the 
temptation  ;  they  did  not  issue  their  inconvertible 
notes  extravagantly.  And  the  proof  is,  that  for 
more  than  ten  years  after  trie  suspension  of  cash 
payments  the  Bank  paper  was  undepreciated,  and 
circulated  at  no  discount  in  comparison  with  gold. 
Though  the  Bank  directors  of  that  day  at  last 
fell  into  errors,  yet  on  the  whole  they  acted  with 
singular  judgment  and  moderation.  But  when,  in 
1810,  they  came  to  be  examined  as  to  their  reasons, 
they  gave  answers  that  have  become  almost  clas- 
sical by  their  nonsense.  Mr.  Pearse,  the  Governor 
of  the  Bank,  said  : — 

'In  considering  this  subject,  with  reference  to 
the  manner  in  which  bank-notes  are  issued,  result- 
ing from  the  applications  made  for  discounts  to 
supply  the  necessary  want  of  bank-notes,  by  which 
their  issue  in  amount  is  so  controlled  that  it  can 
never  amount  to  an  excess,  I  cannot  see  how  the 
amount  of  bank-notes  issued  can  operate  upon  the 
price  of  bullion,  or  the  state  of  the  exchanges; 


£76  THE  BANK'S  ADMINISTRATION 

and  therefore  I  am  individually  of  opinion  that  the 
price  of  bullion,  or  the  state  of  the  exchanges, 
can  never  be  a  reason  for  lessening  the  amount 
of  bank-notes  to  be  issued,  always  understanding 
the  control  which  I  have  already  described. 

'  Is  the  Governor  of  the  Bank  of  the  same 
opinion  which  has  now  been  expressed  by  the 
Deputy-Governor  ? 

'  Mr.  Whitmore — I  am  so  much  of  the  same 
opinion,  that  I  never  think  it  necessary  to  advert 
to  the  price  of  gold,  or  the  state  of  the  exchange, 
on  the  days  on  which  we  make  our  advances. 

*  Do  you  advert  to  these  two  circumstances  with 
a  view  to  regulate  the  general  amount  of  your 
advances  ? — I  do  not  advert  to  it  with  a  view  to 
our  general  advances,  conceiving  it  not  to  bear 
upon  the  question.' 

And  Mr.  Harman,  another  Bank  director, 
expressed  his  opinion  in  these  terms : — '  I  must 
very  materially  alter  my  opinions  before  I  can 
suppose  that  the  exchanges  will  be  influenced  by 
any  modifications  of  our  paper  currency.' 

Very  few  persons  perhaps  could  have  managed 
to  commit  so  many  blunders  in  so  few  words. 

But  it  is  no  disgrace  at  all  to  the  Bank  directors 
of  that  day  to  have  committed  these  blunders, 
They  spoke  according  to  the  best  mercantile 


JF   THE   RESERVE.  \jj 

opinion  of  England.  The  City  of  London  and 
the  House  of  Commons  both  approved  of  what 
they  said ;  those  who  dissented  were  said  to  be 
abstract  thinkers  and  unpractical  men.  The  Bank 
directors  adopted  the  ordinary  opinions,  and  pur- 
sued the  usual  practice  of  their  time.  It  was  this 
'  routine '  that  caused  their  moderation.  They 
believed  that  so  long  as  they  issued  '  notes  '  only 
at  5  per  cent,  and  only  on  the  discount  of  good 
bills,  those  notes  could  not  be  depreciated.  And 
as  the  number  of  '  good  '  bills — bills  which  sound 
merchants  know  to  be  good — does  not  rapidly 
increase,  and  as  the  market  rate  of  interest  was 
often  less  than  5  per  cent.,  these  checks  on  over- 
issue were  very  effective.  They  failed  in  time, 
and  the  theory  upon  which  they  were  defended 
was  nonsense  ;  but  for  a  time  their  operation  was 
powerful  and  excellent. 

Unluckily,  in  the  management  of  the  matter 
before  us — the  management  of  the  Bank  reserve— 
the  directors  of  the  Bank  of  England  were  neither 
acquainted  with  right  principles,  nor  were  they 
protected  by  a  judicious  routine.  They  could  not 
be  expected  themselves  to  discover  such  principles. 
The  abstract  thinking  of  the  world  is  never  to  be 
expected  from  persons  in  high  places  ;  the  ad- 
ministration of  first-rate  current  transactions  is  a 
8* 


I7<$  THE  BANK'S  ADMINISTRATION 

most  engrossing  business,  and  those  .charged  with 
them  are  usually  but  little  inclined  to  think  on 
points  of  theory,  even  when  such  thinking  most 
nearly  concerns  those  transactions.  No  doubt 
when  men's  own  fortunes  are  at  stake,  the  instinct 
of  the  trader  does  somehow  anticipate  the  con- 
clusions of  the  closet.  But  a  board  has  no  in- 
stincts when  it  is  not  getting  an  income  for  its 
members,  and  when  it  is  'only  discharging  a  duty 
of  office.  During  the  suspension  of  cash  pay- 
ments— a  suspension  which  lasted  twenty-two 
years — all  traditions  as  to  a  cash  reserve  had  died 
away.  After  1819  the  Bank  directors  had  to  dis- 
charge the  duty  of  keeping  a  banking  reserve, 
and  (as  the  law  then  stood)  a  currency  reserve 
also,  without  the  guidance  either  of  keen  interests, 
or  good  principles,  or  wise  traditions. 

Under  such  circumstances,  the  Bank  directors 
inevitably  made  mistakes  of  the  gravest  magnitude. 

The  first  time  of  trial  came  in  1825.  In  that 
year  the  Bank  directors  allowed  their  stock  o( 
bullion  to  fall  in  the  most  alarming  manner : — 

£ 

On  Dec.  24,  1824,  the  coin  and  bullion  in  the  Bank 

was 10,721,000 

On  Dec.  25,  1825,  ^  was  reduced  to        ...         1,260,000 

--and  the  consequence  was  a  panic  so  tremendous 


OF   THE  RESERVE.  179 

that  its  results  are  well  remembered  after  nearly 
fifty  years.  In  the  next  period  of  extreme  trial — - 
in  1837-9 — the  Bank  was  compelled  to  draw  for 
2,ooo,ooo/.  on  the  Bank  of  France  ;  and  even  after 
that  aid  the  directors  permitted  their  bullion, 
which  was  still  the  currency  reserve  as  well  as 
the  banking  reserve,  to  be  reduced  to  2,404,000^  : 
a  great  alarm  pervaded  society,  and  generated  an 
eager  controversy,  out  of  which  ultimately  emerged 
the  Act  of  1844.  The  next  trial  came  in  1847, 
and  then  the  Bank  permitted  its  banking  reserve 
(which  the  law  had  now  distinctly  separated)  to  fall 
to  i,i76,ooo/.  ;  and  so  intense  was  the  alarm,  that 
the  executive  Government  issued  a  letter  of 
licence,  permitting  the  Bank,  if  necessary,  to 
break  the  new  law,  and,  if  necessary,  to  borrow 
from  the  currency  reserve,  which  was  full,  in  aid 
of  the  banking  reserve,  which  was  empty.  Till 
1857  there  was  an  unusual  calm  in  the  money 
market,  but  in  the  autumn  of  that  year  the  Bank 
directors  let  the  banking  reserve,  which  even  in 
October  was  far  too  small,  fall  thus : 

£ 

Oct.  30 4,024,000 

,,I7 c  3,217,000 

,,24 :  3,485,000 

»,         3* 2,258,000 

Nov.  6 2,155,000 

»    13  957,000 


iSO  THE  BANK^S  ADMINISTRATION1 

And  then  a  letter  of  licence  like  that  of  1847 
was  not  only  issued,  but  used.  The  Ministry  of 
the  day  authorised  the  Bank  to  borrow  from  the 
currency  reserve  in  aid  of  the  banking"  reserve, 
and  the  Bank  of  England  did  so  borrow  several 
hundred  pounds  till  the  end  of  the  month  ol 
November.  A  more  miserable  catalogue  than 
that  of  the  failures  of  the  Bank  of  England  to 
keep  a  good  banking  reserve  in  all  the  seasons 
of  trouble  between  1825  and  185715  scarcely  to 
be  found  in  history. 

But  since  1857  there  has  been  a  great  improve 
ment.  By  painful  events  and  incessant  discussions, 
men  of  business  have  now  been  trained  to  see  thar 
a  large  banking  reserve  is  necessary,  and  to 
understand  that,  in  the  curious  constitution  of  the 
English  banking  world,  the  Bank  of  England  is 
the  only  body  which  could  effectually  keep  ir 
They  have  never  acknowledged  the  duty ;  some 
of  them,  as  we  have  seen,  deny  the  duty  ;  still  they 
have  to  a  considerable  extent  begun  to  perform  the 
duty.  The  Bank  directors,  being  experienced  and 
able  men  of  business,  comprehended  this  like  other 
men  of  business.  Since  1857  they  have  always 
kept,  I  do  not  say  a  sufficient  banking  reserve,  but 
a  fair  and  creditable  banking  reserve,  and  one  al- 
together different  from  any  which  they  kept  before 


OF   THE  RESERVE.  i$\ 

At  one  period  the  Bank  directors  even  went  farther : 
they  made  a  distinct  step  in  advance  of  the  public 
intelligence ;  they  adopted  a  particular  mode  ol 
raising  the  rate  of  interest,  which  is  far  more  / 
efficient  than  any  other  mode.  Mr.  Goschen 
observes,  in  his  book  on  the  Exchanges  : — 

'  Between  the  rates  in  London  and  Paris,  the 
expense  of  sending  gold  to  and  fro  having  been 
reduced  to  a  minimum  between  the  two  cities,  the 
difference  can  never  be  very  great.;  but  it  must 
not  be  forgotten  that, — the  interest  being  taken 
at  a  percentage  calculated  per  annum,  and  the 
probable  profit  having,  when  an  operation  in 
three-month  bills  is  contemplated,  to  be  divided 
by  four,  whereas  the  percentage  of  expense  has 
to  be  wholly  borne  by  the  one  transaction, — a 
very  slight  expense  becomes  a  great  impediment. 
If  the  cost  is  only  \  per  cent.,  there  must  be  a 
profit  of  2  per  cent,  in  the  rate  of  interest,  or  £ 
per  cent,  on  three  months,  before  any  advantage 
commences ;  and  thus,  supposing  that  Paris  capi- 
talists calculate  that  they  may  send  their  gold 
over  to  England  for  -|  per  cent,  expense,  and 
chance  their  being  so  favoured  by  the  Exchanges 
as  to  be  able  to  draw  it  back  without  any  cost  at 
all,  there  must  nevertheless  be  an  excess  of  more 
than  2  per  cent,  in  the  London  rate  of  interest 


THE  BANK'S  ADMINISTRATION 

over  that  in  Paris,  before  the  operation  of  sending 
gold  over  from  France,  merely  for  the  sake  of  the 
higher  interest,  will  pay.' 

Accordingly,  Mr.  Goschen  recommended  that 
the  Bank  of  England  should,  as  a  rule,  raise  theii 
rate  by  steps  of  i  per  cent,  at  a  time  when  the  object 
of  the  rise  was  to  affect  the  '  foreign  Exchanges.' 
And  the  Bank  of  England,  from  1860  onward, 
have  acted  upon  that  principle.  Before  that  time 
they  used  to  raise  their  rate  almost  always  by 
steps  of  ^  per  cent,  and  there  was  nothing  in  the 
general  state  of  mercantile  opinion  to  compel  them 
to  change  their  policy.  The  change  was,  on  the 
contrary,  most  unpopular.  On  this  occasion,  and, 
as  far  as  I  know,  on  this  occasion  alone,  the  Bank 
of  England  made  an  excellent  alteration  of  their 
policy,  which  was  not  exacted  by  contemporary 
opinion,  and  which  was  in  advance  of  it. 

The  beneficial  results  of  the  improved  policy 
of  the  Bank  were  palpable  and  speedy.  We  were 
enabled  by  it  to  sustain  the  great  drain  of  silver 
from  Europe  to  India  to  pay  for  Indian  cotton  in 
the  years  between  1862-1865.  In  the  autumn  of 
1864  there  was  especial  danger;  but,  by  a  rapid 
and  able  use  of  their  new  policy,  the  Bank  of 
England  maintained  an  adequate  reserve,  and 
preserved  the  country  from  calamities  which,  if 


OF   THE  RESERVK.  1 83 

we  had  looked  only  to  precedent,  would  have 
seemed  inevitable.  All  the  causes  which  produced 
the  panic  of  1857  were  in  action  in  1864 — the 
drain  of  silver  in  1864  and  the  preceding  year 
was  beyond  comparison  greater  than  in  1857  and 
the  years  before  it — and  yet  in  1864  there  was 
no  panic.  The  Bank  of  England  was  almost 
immediately  rewarded  for  its  adoption  of  right 
principles  by  finding  that  those  principles,  at  a 
severe  crisis,  preserved  public  credit. 

In  1866  undoubtedly  a  panic  occurred,  but  I  do 
not  think  that  the  Bank  of  England  can  be  blamed 
for  it.  They  had  in  their  till  an  exceedingly  good 
reserve  according  to  the  estimate  of  that  time — a 
sufficient  reserve,  in  all  probability,  to  have  coped 
with  the  crises  of  1847  and  1857.  The  suspension 
of  Overend  and  Gurney — the  most  trusted  private 
firm  in  England — caused  an  alarm,  in  suddenness 
and  magnitude,  without  example.  What  was  the 
effect  of  the  Act  of  1844  on  the  panic  of  1866  is  a 
question  on  which  opinion  will  be  long  divided ; 
but  I  think  it  will  be  generally  agreed  that,  acting 
under  the  provisions  of  that  law,  the  directors  of 

:he  Bank  of  England  had  in  their  banking  depart- 
ment in  that  year  a  fairly  large  reserve — quite  as 
large  a  reserve  as  anyone  expected  them  to  keep 

—to  meet  unexpected  and  painful  contingencies. 


BANK'S  ADMINISTRATION 

From  1866  to  1870  there  was  almost  an  un- 
broken calm  on  the  money  market  The  Bank 
of  England  had  no  difficulties  to  cope  with  ;  there 
was  no  opportunity  for  much  discretion.  The 
money  market  took  care  of  itself.  But  in  1870 
the  Bank  of  France  suspended  specie  payments,  and 
from  that  time  a  new  era  begins.  The  demands 
on  this  market  for  bullion  have  been  greater,  and 
have  been  more  incessant,  than  they  ever  were 
before,  for  this  is  now  the  only  bullion  market.  This 
has  made  it  necessary  for  the  Bank  of  England  to 
hold  a  much  larger  banking  reserve  than  was  ever 
before  required,  and  to  be  much  more  watchful  than 
in  former  times  lest  that  banking  reserve  should  on 
a  sudden  be  dangerously  diminished.  The  forces 
are  greater  and  quicker  than  they  used  to  be,  and 
a  firmer  protection  and  a  surer  solicitude  are 
necessary.  But  I  do  not  think  the  Bank  of  Eng- 
land is  sufficiently  aware  of  this.  All  the  govern- 
ing body  of  the  Bank  certainly  are  not  aware  of  it. 
The  same  eminent  director  to  whom  I  have  before 
referred,  Mr.  Hankey,  published  in  the  '  Times  ' 
an  elaborate  letter,  saying  again  that  one-third 
of  the  liabilities  were,  even  in  these  altered  times, 
a  sufficient  reserve  for  the  Banking  Department 
of  the  Bank  of  England,  and  that  it  was  no  part  of 
the  business  of  the  Bank  to  keep  a  supply  oi 


OF   THE  RESERVE.  igj 

'  bullion  for  exportation/  which  was  exactly  the 
most  mischievous  doctrine  that  could  be  main* 
tained  when  the  Banking  Department  of  the  Bank 
of  England  had  become  the  only  great  repository 
in  Europe  where  gold  could  at  once  be  obtained, 
and  when,  therefore,  a  far  greater  store  of  bullion 
ought  to  be  kept  than  at  any  former  period. 

And  besides  this  defect  of  the  present  time, 
there  are  some  chronic  faults  in  the  policy 
of  the  Bank  of  England,  which  arise,  as  will  be 
presently  explained,  from  grave  defects  in  its 
form  of  government. 

There  is  almost  always  some  hesitation  when  a 
Governor  begins  to  reign.  He  is  the  Prime 
Minister  of  the  Bank  Cabinet ;  and  when  so  im- 
portant a  functionary  changes,  naturally  much  else 
changes  too.  If  the  Governor  be  weak,  this  kind 
of  vacillation  and  hesitation  continues  throughout 
his  term  of  office.  The  usual  defect  then  is,  that 
the  Bank  of  England  does  not  raise  the  rate  of 
interest  sufficiently  quickly.  It  does  raise  it ;  in 
the  end  it  takes  the  alarm,  but  it  does  not  take 
the  alarm  sufficiently  soon.  A. cautious  man,  in  a 
new  office,  does  not  like  strong  measures.  Bank 
Governors  are  generally  cautious  men  ;  they  are 
taken  from  a  most  cautious  class  ;  in  consequence 
they  are  very  apt  to  temporise  and  delay.  But 


1 86  TffE  BANK'S  ADMINISTRATION 

almost  always  the  delay  in  creating  a  stringency 
only  makes  a  greater  stringency  inevitable.  The 
effect  of  a  timid  policy  has  been  to  let  the  gold 
out  of  the  Bank,  and  that  gold  must  be  recov* 
ered.  It  would  really  have  been  far  easier  to 
have  maintained  the  reserve  by  timely  measures 
than  to  have  replenished  it  by  delayed  measures ; 
but  new  Governors  rarely  see  this. 

Secondly.  Those  defects  are  apt,  in  part,  or  as 
a  whole,  to  be  continued  throughout  the  reign  of 
a  weak  Governor.  The  objection  to  a  decided 
policy,  and  the  indisposition  to  a  timely  action, 
which  are  excusable  in  one  whose  influence  is 
beginning,  and  whose  reign  is  new,  is  continued 
through  the  whole  reign  of  one  to  whom  those 
defects  are  natural,  and  who  exhibits  those  defects 
in  all  his  affairs. 

Thirdly.  This  defect  is  enhanced,  because,  as  has 
so  often  been  said,  there  is  now  no  adequate  rule 
recognised  in  the  management  of  the  banking 
reserve.  Mr.  Weguelin,  the  last  Bank  Governor 
who  has  been  examined,  said  that  it  was  sufficient 
for  the  Bank  to  keep  from  one-fourth  to  one -third 
of  its  banking  liabilities  as  a  reserve.  But  no  one 
now  would  ever  be  content  if  the  banking  reserve 
were  near  to  one-fourth  of  its  liabilities.  Mr, 
Hankey,  as  I  have  shown,  considers '  about  a  third 


OF   THE  RESERVE.  \ %] 

cis  the  proportion  of  reserve  to  liability  at  which 
the  Bank  should  aim ;  but  he  does  not  say  whether 
he  regards  a  third  as  the  minimum  below  which 
the  reserve  in  the  Banking  Department  should 
never  be,  or  as  a  fair  average,  about  which  the 
reserve  may  fluctuate,  sometimes  being  greater, 
or  at  others  less. 

In  a  future  chapter  I  shall  endeavour  to  show 
that  one-third  of  its  banking  liabilities  is  at  present 
by  no  means  an  adequate  reserve  for  the  Banking 
Department — that  it  is  not  even  a  proper  minimum, 
far  less  a  fair  average  ;  and  I  shall  allege  what 
seem  to  me  good  reasons  for  thinking  that,  unless 
the  Bank  aim  by  a  different  method  at  a  higher 
standard,  its  own  position  may  hereafter  be  peril- 
ous, and  the  public  may  be  exposed  to  disaster. 


ii. 

But,  as  has  been  explained,  the  Bank  of  England 
is  bound,  according  to  our  system,  not  only  to  keep 
a  good  reserve  against  a  time  of  panic,  but  to  use 
that  reserve  effectually  when  that  time  of  panic 
comes.  The  keepers  of  the  Banking  reserve, 
whether  one  or  many,  are  obliged  then  to  use  that 
reserve  for  their  own  safety.  If  they  permit  all 


THE  BANK*S  ADMINISTRATION 


forms  of  credit  ,-tGL  perish,  .  their  own  will 
perish  immediately,  and  in  consequence. 

As  to  the  Bank  of  England,  however,  this  is 
denied.  It  is  alleged  that  the  Bank  of  England 
can  keep  aloof  in  a  panic;  that  it  can,  if  it  will, 
let  other  banks  and  trades  fail  ;  that  if  it  chooses, 
it  can  stand  alone,  and  survive  intact  while  all  else 
perishes  around  it.  On  various  occasions,  most 
influential  persons,  both  in  the  government  of  the 
Bank  and  out  of  it,  have  said  that  such  was  their 
opinion.  And  we  must  at  once  see  whether  this 
opinion  is  true  or  false,  for  it  is  absurd  to  attempt 
to  estimate  the  conduct  of  the  Bank  of  England 
during  panics  before  we  know  what  the  precise 
position  of  the  Bank  in  a  panic  really  is. 

The  holders  of  this  opinion  in  its  most  extreme 
form  say,  that  in  a  panic  the  Bank  of  England  can 
stay  its  hand  at  any  time  ;  that,  though  it  has 
advanced  much,  it  may  refuse  to  advance  more  j 
that  though  the  reserve  may  have  been  reduced 
by  such  advances,  it  may  refuse  to  lessen  it  still 
further  ;  that  it  can  refuse  to  make  any  further 
discounts  ;  that  the  bills  which  it  has  discounted 
will  become  due  ;  that  it  can  refill  its  reserve  by 
the  payment  of  those  bills  ;  that  it  can  sell  stock 
or  other  securities,  and  so  replenish  its  reserve 
still  further.  But  in  this  form  the  notion  scarcely 


OF   THE  RESERVE.  1 89 

merits  serious  refutation.  If  the  Bank  reserve 
has  once  become  low,  there  are,  in  a  panic,  no 
means  of  raising  it  again.  Money  parted  with  at 
such  a  time  is  very  hard  to  get  back ;  those  who 
have  taken  it  will  not  let  it  go — not,  at  least,  unless 
they  are  sure  of  getting  other  money  in  its  place. 
And  at  such  instant  the  recovery  of  money  is  as 
hard  for  the  Bank  of  England  ^as  for  any  one  else, 
probably  even  harder.  The  difficulty  is  this :  if 
the  Bank  decline  to  discount,  the  holders  of  the 
bills  previously  discounted  cannot  pay.  As  has 
been  shown,  trade  in  England  is  largely  carried  on 
with  borrowed  money.  If  you  propose  greatly  to 
reduce  that  amount,  you  will  cause  many  failures 
unless  you  can  pour  in  from  elsewhere  some  equi- 
valent amount  of  new  money.  But  in  a  panic 
there  is  no  new  money  to  be  had  ;  everybody  who 
has  it  clings  to  it,  and  will  not  part  with  it. 
Especially  what  has  been  advanced  to  merchants 
cannot  easily  be  recovered ;  they  are  under 
immense  liabilities,  and  they  will  not  give  back  a 
penny  which  they  imagine  that  even  possibly  they 
may  need  to  discharge  those  liabilities.  And 
bankers  are  in  even  greater  terror.  In  a  panic 
they  will  not  discount  a  host  of  new  bills  ;  they 
are  engrossed  with  their  own  liabilities  and  those 
of  their  own  customers,  and  do  not  care  for  those 


THE  BANK'S  ADMINISTRATION 

of  others.  The  notion  that  the  Bank  of  England 
can  stop  discounting  in  a  panic,  and  so  obtain  fresh 
money,  is  a  delusion.  It  can  stop  discounting,  ol 
course,  at  pleasure.  But  if  it  does,  it  will  get  in 
no  new  money  ;  its  bill  case  will  daily  be  more 
and  more  packed  with  bills  '  returned  unpaid/ 

The  sale  of  stock,  too,  by  the  Bank  of  England 
in  the  middle  of  a  panic  is  impossible.  The  bank 
at  such  a  time  is  the  only  lender  on  stock,  and  it 
is  only  by  loans  from  a  bank  that  large  purchases, 
at  such  a  moment,  can  be  made.  Unless  the 
Bank  of  England  lend,  no  stock  will  be  bought. 
There  is  not  in  the  country  any  large  sum  of  un- 
used ready  money  ready  to  buy  it.  The  only 
unused  sum  is  the  reserve  in  the  Banking  Depart- 
ment of  the  Bank  of  England :  if,  therefore,  in  a 
panic  that  Department  itself  attempt  to  sell  stock, 
the  failure  would  be  ridiculous.  It  would  hardly  be 
able  to  sell  any  at  all.  Probably  it  would  not  sell 
fifty  pounds'  worth.  The  idea  that  the  Bank  can, 
during  a  panic,  replenish  its  reserve  in  this  or  in 
any  other  manner  when  that  reserve  has  once  been 
allowed  to  become  empty,  or  nearly  empty,  is  too 
absurd  to  be  steadily  maintained,  though  I  fear 
that  it  is  not  yet  wholly  abandoned. 

The  second  and  more  reasonable  conception 
of  the  independence  of  the  Bank  of  England  is 


OF   THE  RESERVE.  19* 

however,  this: — It  may  be  said,  and  it  is  said, 
that  if  the  Bank  of  England  stop  at  the  beginning 
of  a  panic,  if  it  refuse  to  advance  a  shilling  more 
than  usual,  if  it  begin  the  battle  with  a  good 
banking  reserve,  and  do  not  diminish  it  by  extra 
loans,  the  Bank  of  England  is  sure  to  be  safe. 
But  this  form  of  the  opinion,  though  more  reason- 
able and  moderate,  is  not,  therefore,  more  true. 
The  panic  of  1866  is  the  best  instance  to  test  it. 
As  everyone  knows,  that  panic  began  quite  sud- 
denly, on  the  fall  of  '  Overends.'  Just  before,  the 
Bank  had  5,8i2,ooo/.  in  its  reserve;  in  fact,  it 
advanced  I3,ooo,ooo/.  of  new  money  in  the  next 
few  days,  and  its  reserve  went  down  to  nothing, 
and  the  Government  had  to  help.  But  if  the 
Bank  had  not  made  these  advances,  could  it  have 
kept  its  reserve  ? 

Certainly  it  could  not.  It  could  not  have  retained 
its  own  deposits.  A  large  part  of  these  are  the 
deposits  of  bankers,  and  they  would  not  consent 
to  help  the  Bank  of  England  in  a  policy  of  isola 
tion.  They  would  not  agree  to  suspend  payments 
themselves,  and  permit  the  Bank  of  England  to 
survive,  and  get  all  their  business.  They  would 
withdraw  their  deposits  from  the  Bank  ;  they 
would  not  assist  it  to  stand  erect  amid  their  ruin. 
But  even  if  this  were  not  so  even  if  the  banks 


192 


THE  BANK^S  ADMINISTRATION 


were  willing  to  keep  their  deposits  at  the  Bank 
while  it  was  not  lending,  they  would  soon  find  that 
they  could  not  do  it.  They  are  only  able  to  keep 
those  deposits  at  the  Bank  by  the  aid  of  the 
Clearing-house  system,  and  if  a  panic  were  to 
pass  a  certain  height,  that  system,  which  rests  on 
confidence,  would  be  destroyed  by  terror. 

The  common  course  of  business  is  this.  A  B 
having  to  receive  5o,ooo/.  from  C  D  takes  C  D's 
cheque  on  a  banker  crossed,  as  it  is  called,  and, 
therefore,  only  payable  to  another  banker.  He 
pays  that  cheque  to  his  own  credit  with  his  own 
banker,  who  presents  it  to  the  banker  on  whom  it 
is  drawn,  and  if  good  it  is  an  item  between  them  in 
the  general  clearing  or  settlement  of  the  afternoon. 
But  this  is  evidently  a  very  refined  machinery, 
which  a  panic  will  be  apt  to  destroy.  At  the  first 
stage  A  B  may  say  to  his  debtor  C  D,  '  I  cannot 
take  your  cheque,  I  must  have  bank-notes.'  If  it 
is  a  debt  on  securities,  he  will  b'e  very  apt  to  say 
this.  The  usual  practice — credit  being  good — 
is  for  the  creditor  to  take  the  debtor's  cheque, 
and  to  give  up  the  securities.  But  if  the 
'  securities  '  really  secure  him  in  a  time  of  difficulty, 
he  will  not  like  to  give  them  up,  and  take  a  bit  o\ 
paper — a  mere  cheque,  which  may  be  paid  or  not 
paid.  He  will  say  to  his  debtor,  '  I  can  only  give 


OF   THE  RESERVE. 


193 


you  your  securities  if  you  will  give  me  bank-notes.' 
And  if  he  does  say  so,  the  debtor  must  go  to  his 
bank,  and  draw  out  the  5o,ooo/.  if  he  has  it.  But 
if  this  were  done  on  a  large  scale,  the  bank's 
r  cash  in  house '  would  soon  be  gone  ;  as  the 
Clearing-house  was  gradually  superseded  it  would 
have  to  trench  on  its  deposit  at  the  Bank  of  Eng- 
land ;  and  then  the  bankers  would  have  to  pay  so 
much  over  the  counter  that  they  would  be  unable 
to  keep  much  money  at  the  Bank,  even  if  they 
wished.  They  would  soon  be  obliged  to  draw 
out  every  shilling. 

The  diminished  use  of  the  Clearing-house,  in 
consequence  of  the  panic,  would  intensify  that 
panic.  By  far  the  greater  part  of  the  bargains  of 
the  country  in  moneyed  securities  is  settled  on  the 
Stock  Exchange  twice  a  month,  and  the  number 
of  securities  then  given  up  for  mere  cheques,  and 
the  number  of  cheques  then  passing  at  the  Clear- 
ing-house are  enormous.  If  that  system  collapse 
the  number  of  failures  would  be  incalculable,  and 
each  failure  would  add  to  the  discredit  that  caused 
the  collapse. 

The  non-banking  customers  of  the  Bank  of 
England  would  be  discredited  as  well  as  other 
people ;  their  cheques  would  not  be  taken  any 
more  than  those  of  others  ;  they  would  have  tc 

9 


THE  BANK'S  ADMINISTRATION 

draw  out  bank-notes,  and  the  Bank  reserve  would 
not  be  enough  for  a  tithe  of  such  payments. 

The  matter  would  come  shortly  to  this  :  a  great 
number  of  brokers  and  dealers  are  under  obliga- 
tions to  pay  immense  sums,  and  in  common  times 
they  obtain  these  sums  by  the  transfer  of  certain 
securities.  If,  as  we  said  just  now,  No.  i  has 
borrowed  5O,ooo/.  of  No.  2  on  Exchequer  bills,  he, 
for  the  most  part,  cannot  pay  No.  2  till  he  has 
sold  or  pledged  those  bills  to  some  one  else. 
But  till  he  has  the  bills  he  cannot  pledge  or  seL 
them  ;  and  if  No.  2  will  not  give  them  up  till  he 
gets  his  money,  No  i.  will  be  ruined,  because  he 
cannot  pay  it.  And  if  No.  2  has  No.  3  to  pay,  as  is 
very  likely,  he  may  be  ruined  because  of  No.  I's 
default,  and  No.  4  only  on  account  of  No.  3\s  de- 
fault ;  and  so  on  without  end.  On  settling  day, 
without  the  Clearing-house,  there  would  be  a  mass 
of  failures,  and  a  bundle  of  securities.  The  effect 
of  these  failures  would  be  a  general  run  on  all 
bankers,  and  on  the  Bank  of  England  particularly. 

It  may  indeed  be  said  that  the  money  thus  taken 
from  the  Banking  Department  of  the  Bank  of 
England  would  return  there  immediately ;  that 
the  public  who  borrowed  it  would  not  know 
where  else  to  deposit  it ;  that  it  would  be  taken 
out  in  the  morning,  and  put  back  in  the  evening. 


OF   THE  RESERVE.  !9$ 

But,  in  the  first  place,  this  argument  assumes  that 
the  Banking  Department  would  have  enough 
money  to  pay  the  demands  on  it ;  and.  this  is  a 
mistake  :  the  Banking  Department  would  not  have 
a  hundredth  part  of  the  necessary  funds.  And 
in  the  second,  a  great  panic  which  deranged 
the  Clearing-house  would  scon  be  diffused  all 
through  the  country.  The  money  therefore 
taken  from  the  Bank  of  England  could  not  be 
soon  returned  to  the  Bank;  it  would  not  come 
back  on  the  evening  of  the  day  on  which  it  was 
taken  out,  or  for  many  days  ;  it  would  be  dis- 
tributed through  the  length  and  breadth  of  the 
country,  wherever  there  were  bankers,  wherever 
there  was  trade,  wherever  there  were  liabilities, 
wherever  there  was  terror. 

And  even  in  London,  so  immense  a  panic 
would  soon  impair  the  credit  of  the  Banking 
Department  of  the  Bank  of  England.  That  de- 
partment has  no  great  prestige.  It  was  only 
created  in  1844,  and  it  has  failed  three  times 
since.  The  world  would  imagine  that  what  has 
happened  before  will  happen  again  ;  and  when 
they  have  got  money,  they  will  not  deposit  it  at 
an  establishment  which  may  not  be  able  to  repay 
it.  This  did  not  happen  in  former  panics, 
because  the  case  we  are  considering  never  arose 


196 


THE  BANK'S  ADMINISTRATION 


The  Bank  was  helping  the  public,  and,  more  01 
less  confidently,  it  was  believed  that  the  Govern 
ment  would  help  the  Bank.  But  if  the  policy  bf 
relinquished  which  formerly  assuaged  alarm,  that 
alarm  will  be  protracted  and  enhanced,  till  it  touch 
the  Banking  Department  of  the  Bank  itself. 

I  do  not  imagine  that  it  would  touch  the  Is- 
sue Department.  I  think  that  the  public  would 
[be  quite  satisfied  if  they  obtained  bank-notes. 
Generally  nothing  is  gained  by  holding  the  notes 
of  a  bank  instead  of  depositing  them  at  a  bank. 
But  in  the  Bank  of  England  there  is  a  great 
difference  :  their  notes  are  legal  tender.  Whoever 
holds  them  can  always  pay  his  debts,  and,  except 
for  foreign  payments,  he  could  want  no  more. 
The  rush  would  be  for  bank-notes  ;  those  that 
could  be  obtained  would  be  carried  north,  south, 
east,  and  west,  and,  as  there  would  not  be  enough 
for  all  the  country,  the  Banking  Department 
would  soon  pay  away  all  it  had. 

Nothing,  therefore,  can  be  more  certain  than 
that  the  Bank  of  England  has  in  this  respect  no 
peculiar  privilege  ;  that  it  is  simply  in  the  position 
of  a  Bank  keeping  the  Banking  reserve  of  the 
country  ;  that  it  must  in  time  of  panic  do  what  all 
other  similar  banks  must  do ;  that  in  time  oi 
panic  it  must  advance  freely  and  vigorously  to 
the  public  out  of  the  reserve. 


OF   THE  RESERVE.  197 

And  with  the  Bank  of  England,  as  with  other 
Banks  in  the  same  case,  these  advances,  if  they  are 
to  be  made  at  all,  should  be  made  so  as  if  possible 
to  obtain  the  object  for  which  they  are  made.  The 
end  is  to  stay  the  panic  ;  and  the  advances  should, 
if  possible,  stay  the  panic.  And  for  this  purpose 
there  are  two  rules : — First.  That  these  loans 
should  only  be  made  at  a  very  high  rate  of  in- 
terest. This  will  operate  as  a  heavy  fine  on 
unreasonable  timidity,  and  will  prevent  the  great- 
est number  of  applications  by  persons  who  do  not 
require  it.  The  rate  should  be  raised  early  in 
the  panic,  so  that  the  fine  may  be  paid  early ;  that 
no  one  may  borrow  out  of  idle  precaution  without 
paying  well  for  it ;  that  the  Banking  reserve  may 
be  protected  as  far  as  possible. 

Secondly.  That  at  this  rate  these  advances 
should  be  made  on  all  good  banking  securities, 
and  as  largely  as  the  public  ask  for  them.  The 
reason  is  plain.  The  object  is  to  stay  alarm,  and 
nothing  therefore  should  be  done  to  cause  alarm. 
But  the  way  to  cause  alarm  is  to  refuse  some  one 
who  has  good  security  to  offer.  The  news  of  this 
will  spread  in  an  instant  through  all  the  money 
market  at  a  moment  of  terror ;  no  one  can  say 
exactly  who  carries  it,  but  in  half  an  hour  it  will  be 
Carried  on  all  sides,  and  will  intensify  the  terror 


!£8  THE  BANK'S  ADMINISTRATION 

everywhere.  No  advances  indeed  need  be  made 
by  which  the  Bank  will  ultimately  lose.  The 
amount  of  bad  business  in  commercial  countries  is 
an  inmiitesimally  small  fraction  of  the  whole 
business.  That  in  a  panic  the  bank,  or  banks, 
holding  the  ultimate  reserve  should  refuse  bad 
bills  or  bad  securities  will  not  make  the  panic  really 
worse ;  the  '  unsound '  people  are  a  feeble  minority, 
and  they  are  afraid  even  to  look  frightened  for 
fear  their  unsoundness  may  be  detected.  The 
great  majority,  the  majority  to  be  protected,  are  the 
'  sound '  people,  the  people  who  have  good  se- 
curity to  offer.  If  it  is  known  that  the  Bank  of 
England  is  freely  advancing  on  what  in  ordinary 
times  is  reckoned  a  good  security — on  what  is 
then  commonly  pledged  and  easily  convertible — 
the  alarm  of  the  solvent  merchants  and  bankers 
will  be  stayed.  But  if  securities,  really  good  and 
usually  convertible,  are  refused  by  the  Bank,  the 
alarm  will  not  abate,  the  other  loans  made  will 
fail  in  obtaining  their  end,  and  the  panic  will  be- 
come worse  and  worse. 

It  may  be  said  that  the  reserve  in  the  Banking 
Department  will  not  be  enough  for  all  such  loans. 
If  that  be  so,  the  Banking  Department  must  fail, 
But  lending  is,  nevertheless,  its  best  expedient. 
This  is  the  method  of  making  its  money  go 


OF   THE  RESERVE. 

the  farthest,  and  of  enabling  it  to  get  through  the 
panic  if  anything  will  so  enable  it.  Making  no 
loans  as  we  have  seen  will  ruin  it ;  making  large 
loans  and  stopping,  as  we  have  also  seen,  will  ruin 
it.  The  only  safe  plan  for  the  Bank  is  the  brave 
plan,  to  lend  in  a  panic  on  every  kind  of  current 
security,  or  every  sort  on  which  money  is  ordinarily 
and  usually  lent.  This  policy  may  not  save  the 
Bank  ;  but  if  it  do  not,  nothing  will  save  it. 

If  we  examine  the  manner  in  which  the  Bank 
of  England  has  fulfilled  these  duties,  we  shall 
find,  as  we  found  before,  that  the  true  principle 
has  never  been  grasped  ;  that  the  policy  has  been 
inconsistent ;  that,  though  the  policy  has  much 
improved,  there  still  remain  important  particulars 
in  which  it  might  be  better  than  it  is. 

The  first  panic  of  which  it  is  necessary  here  to 
speak,  is  that  of  1825  :  I  hardly  think  we  should 
derive  much  instruction  from  those  of  1793  and 
1797  ;  the  world  has  changed  too  much  since  ;  and 
during  the  long  period  of  inconvertible  currency 
from  1797  to  1819,  the  problems  to  be  solved  were 
altogether  different  from  our  present  ones.  In 
the  panic  of  1825,  the  Bank  of  England  at  first 
acted  as  unwisely  as  it  was  possible  to  act.  By 
every  means  it  tried  to  restrict  its  advances.  The 
reserve  being  very  small,  it  endeavoured  to 


2OO  THE  BANK^S  ADMINISTRATION' 

protect  that  reserve  by  lending  as  little  as  possible, 
The  result  was  a  period  of  frantic  and  almost 
inconceivable  violence ;  scarcely  any  one  kru?  w 
whom  to  trust ;  credit  was  almost  suspended ; 
the  country  was,  as  Mr.  Huskisson  expressed  it, 
within  twenty-four  hours  of  a  state  of  barter. 
Applications  for  assistance  were,  made  to  the 
Government,  but  though  it  was  well  known  that 
the  Government  refused  to  act,  there  was  not,  as 
far  as  I  know,  until  lately  any  authentic  narrative 
of  the  real  facts.  In  the  '  Correspondence  '  of  the 
Duke  of  Wellington,  of  all  places  in  the  world, 
there  is  a  full  account  of  them.  The  Duke  was 
then  on  a  mission  at  St.  Petersburg,  and  Sir  R. 
Peel  wrote  to  him  a  letter  of  which  the  following 
is  a  part : — 

'  We  have  been  placed  in  a  very  unpleasant 
predicament  on  the  other  question — the  issue  ol 
Exchequer  Bills  by  Government.  The  feeling  of 
the  City,  of  many  of  our  friends,  of  some  of  the 
Opposition,  was  decidedly  in  favour  of  the  issue  of 
Exchequer  Bills  to  relieve  the  merchants  and 
manufacturers. 

'  It  was  said  in  favour  of  the  issue,  that  the  same 
measure  had  been  tried  and  succeeded  in  1793  and 
1811.  Our  friends  whispered  about  that  we  were 
acting  quite  in  a  different  manner  from  that  ic 


OF  THE  RESERVE.  2O1 

which  Mr.  Pitt  did  act,  and  would  have  acted  ha 
he  been  alive. 

'  We  felt  satisfied  that,  however  plausible  were 
the  reasons  urged  in  favour  of  the  issue  of  Exche- 
quer Bills,  yet  that  the  measure  was  a  dangerous 
one,  and  ought  to  be  resisted  by  the  Government. 

'  There  are  thirty  millions  of  Exchequer  Bills 
outstanding.  The  purchases  lately  made  by  the 
Bank  can  hardly  maintain  them  at  par.  If  there 
were  a  new  issue  to  such  an  amount  as  that  con- 
templated— viz.,  five  millions — there  would  be  a 
great  danger  that  the  whole  mass  of  Exchequer 
Bills  would  be  at  a  discount,  and  would  be  paid 
into  the  revenue.  If  the  new  Exchequer  Bills 
were  to  be  issued  at  a  different  rate  of  interest 
from  the  outstanding  ones — say  bearing  an  interest 
of  five  per  cent. — the  old  ones  would  be  imme- 
diately at  a  great  discount  unless  the  interest  were 
raised.  If  the  interest  were  raised,  the  charge  on 
the  revenue  would  be  of  course  proportionate  to 
the  increase  of  rate  of  interest.  We  found  that 
the  Bank  had  the  power  to  lend  money  on  deposit 
of  goods.  As  our  issue  of  Exchequer  Bills  would 
have  been  useless  unless  the  Bank  cashed  them, 
as  therefore  the  intervention  of  the  Bank  was  in 
any  event  absolutely  necessary,  and  as  its  inter- 
vention would  be  chiefly  useful  by  the  effect  which 
0* 


202  THE   BANK'S  ADMINISTRATION 

it  would  have  in  increasing  the  circulating  medium, 
we  advised  the  Bank  to  take  the  whole  affair  into 
their  own  hands  at  once,  to  issue  their  notes  on 
the  security  of  goods,  instead  of  issuing  them  on 
Exchequer  Bills,  such  bills  being  themselves 
issued  on  that  security. 

'  They  reluctantly  consented,  and  rescued  us 
from  a  very  embarrassing  predicament/ 

The  success  of  the  Bank  of  England  on  this 
occasion  was  owing  to  its  complete  adoption  of 
right  principles.  The  Bank  adopted  these  princi- 
ples very  late ;  but  when  it  adopted  them  it  adopted 
them  completely.  According  to  the  official  state- 
ment which  I  quoted  before,  'we/  that  is,  the  Bank 
directors, '  lent  money  by  every  possible  means, and 
in  modes  which  we  had  never  adopted  before  ;  we 
took  in  stock  on  security,  we  purchased  Exchequer 
Bills,  we  made  advances  on  Exchequer  Bills,  we  not 
only  discounted  outright,  but  we  made  advances 
on  deposits  of  bills  of  Exchange  to  an  immense 
amount — in  short,  by  every  possible  means  consis- 
tent with  the  safety  of  the  Bank/  And  for  the 
complete  and  courageous  adoption  of  this  policy 
at  the  last  moment  the  directors  of  the  Bank  of 
England  at  that  time  deserve  great  praise,  for  the 
subject  was  then  less  understood  even  than  it  is 
now;  but  the  directors  of  the  Bank  deserve  also 


OF   THE  RESERVE.  2O1 

severe  censure,  for  previously  choosing  a  contrary 
policy  ;  for  being  reluctant  to  adopt  the  new  one ; 
and  for  at  last  adopting  it  only  at  the  request  of, 
and  upon  a  joint  responsibility  with,  the  Executive 
Government. 

After  1825,  there  was  not  again  a  real 
panic  in  the  money  market  till  1847.  Both 
of  the  crises  of  1837  and  1839  were  severe, 
but  neither  terminated  in  a  panic  :  both  were 
arrested  before  the  alarm  reached  its  final  in- 
tensity ;  in  neither,  therefore,  could  the  policy  of 
the  Bank  at  the  last  stage  of  fear  be  tested. 

In  the  three  panics  since  1844 — in  1847,  1857, 
and  1866 — the  policy  of  the  Bank  has  been  more 
or  less  affected  by  the  Act  of  1844,  and  I  cannot 
therefore  discuss  it  fully  within  the  limits  which 
I  have  prescribed  for  myself.  I  can  only  state 
two  things  :  First,  that  the  directors  of  the  Bank 
above  all  things  maintain,  that  they  have  not  been 
in  the  earlier  stage  of  panic  prevented  by  the  Act 
of  1844  from  making  any  advances  which  they 
would  otherwise  have  then  made.  Secondly,  that 
in  the  last  stage  of  panic,  the  Act  of  1844  has 
been  already  suspended,  rightly  or  wrongly,  on 
these  occasions  ;  that  no  similar  occasion  has  ever 
yet  occurred  in  which  it  has  not  been  suspended  ; 
and  that,  rightly  or  wrongly,  the  world  confidently 


20,j.  THE  BANK'S  ADMINISTRATION 

expects  and  relies  that  in  all  similar  cases  it  will 
be  suspended  again.  Whatever  theory  may 
prescribe,  the  logic  of  facts  seems  peremptory  so 
far.  And  these  principles  taken  together  amount 
to  saying  that,  by  the  doctrine  of  the  directors,  the 
Bank  of  England  ought,  as  far  as  they  can,  to 
manage  a  panic  with  the  Act  of  1844,  pretty  much 
as  they  would  manage  one  without  it — in  the  early 
stage  of  the  panic  because  then  they  are  not 
fettered,  and  in  the  latter  because  then  the  fetter 
has  been  removed. 

We  can  therefore  estimate  the  policy  of  the 
Bank  of  England  in  the  three  panics  which  have 
happened  since  the  Act  of  1844,  without  inquiring 
into  the  effect  of  the  Act  itself.  It  is  certain  that 
in  all  of  these  panics  the  Bank  has  made  very 
large  advances  indeed.  It  is  certain,  too,  that  in 
all  of  them  the  Bank  has  been  quicker  than  it 
was  in  1825  ;  that  in  all  of  them  it  has  less  hesi- 
tated to  use  its  banking  reserve  in  making  the 
advances  which  it  is  one  principal  object  of 
maintaining  that  reserve  to  make,  and  to  make  at 
once.  But  there  is  still  a  considerable  evil. 
No  one  knows  on  what  kind  of  securities  the  Bank 
of  England  will  at  such  periods  make  the  advances 
which  it  is  necessary  to  make. 

As  we  have  seen,  principle  requires  that  sucb 


OF   THE   RESERVE.  20$ 

advances,  if  made  at  all  for  the  purpose  of  curing 
panic,  should  be  made  in  the  manner  most  likely 
to  cure  that  panic.  And  for  this  purpose,  they 
should  be  made  on  everything  which  in  common 
times  is  good  'banking  security.'  The  evil  is,  that 
owing  to  terror,  what  is  commonly  good  security 
has  ceased  to  be  so  ;  and  the  true  policy  is  so  tc 
use  the  Banking  reserve,  that  if  possible  the  tem- 
porary evil  may  be  stayed,  and  the  common 
course  of  business  be  restored.  And  this  can  only 
be  effected  by  advancing  on  all  good  Banking 
securities. 

Unfortunately,  the  Bank  of  England  do^iot  take 
this  course.  The  Discount  office  is  open  for  the 
discount  of  good  bills,  and  makes  immense  advances 
accordingly.  The  Bank  also  advances  on  consols 
and  India  securities,  though  there  was,  in  the  crisis 
of  1866,  believed  to  be  for  a  moment  a  hesitation 
in  so  doing.  But  these  are  only  a  small  part  of 
the  securities  on  which  money  in  ordinary  times 
can  be  readily  obtained,  and  by  which  its  repay- 
ment is  fully  secured.  Railway  debenture  stock  is 
as  good  a  security  as  a  commercial  bill,  and  many 
people,  of  whom  I  own  I  am  one,  think  it  safer 
than  India  stock  ;  on  the  whole,  a  great  railway  is, 
we  think,  less  liable  to  unforeseen  accidents  than 
the  strange  Empire  of  India.  But  I  doubt  if  the 


2O6  THE  BANK^S  ADMINISTRATION 

Bank  of  England  in  a  panic  would  advance  on 
railway  debenture  stock,  at  any  rate  no  one  has 
any  authorised  reason  for  saying  that  it  would. 
And  there  are  many  other  such  securities. 

The  amount  of  the  advance  is  the  main  c  on- 
.^deration  for  the  Bank  of  England,  and  not  the 
nature  of  the  security  on  which  the  advance  is 
made,  always  assuming  the  security  to  be  good. 
An  idea  prevails  (as  I  believe)  at  the  Bank  of 
England  that  they  ought  not  to  advance  during 
a  panic  on  any  kind  of  security  on  which  they  do 
not  commonly  advance.  But  if  bankers  for  the 
most  part  do  advance  on  such  security  in  common 
times,  and  if  that  security  is  indisputably  good, 
the  ordinary  practice  of  the  Bank  of  England 
is  immaterial.  In  ordinary  times  the  Bank  is 
only  one  of  many  lenders,  whereas  in  a  panic  it 
is  the  sole  lender,  and  we  want,  as  far  as  we  can, 
to  bring  back  the  unusual  state  of  a  time  of  panic 
to  the  common  state  of  ordinary  times. 

In  common  opinion  there  is  always  great  uncer- 
tainty as  to  the  conduct  of  the  Bank :  the  Bank 
lias  never  laid  down  any  clear  and  sound  policy  on 
the  subject.  As  we  have  seen,  some  of  its  directors 
(like  Mr.  Hankey)  advocate  an  erroneous  policy. 
The  public  is  never  sure  what  policy  will  be 
adopted  at  the  most  important  moment :  it  is  not 


OF   THE  RESERVE.  2O? 

sure  what  amount  of  advance  will  be  made,  or  on 
what  security  it  will  be  made.  The  best  pallia- 
tive to  a  panic  is  a  confidence  in  the  adequate 
amount  of  the  Bank  reserve,  and  in  the  efficient 
use  of  that  reserve.  And  until  we  have  on  this 
point  a  clear  understanding  with  the  Bank  of 
England,  both  our  liability  to  crises  and  our  terroi 
at  crises  will  always  be  greater  than  they  would 
otherwise  be. 


CHAPTER    VIII. 

THE  GOVERNMENT  OF  THE  BANK  OF  ENGLAND. 

THE  Bank  of  England  is  governed  by  a  board  ol 
directors,  a  Governor,  and  a  Deputy-Governor; 
and  the  mode  in  which  these  are  chosen,  and  the 
time  for  which  they  hold  office,  affect  the  whole  ol 
its  business.  The  board  of  directors  is  in  fact 
self-electing.  In  theory  a  certain  portion  go  out 
annually,  remain  out  for  a  year,  and  are  subject  to 
re-election  by  the  proprietors.  But  in  fact  they 
are  nearly  always,  and  always  if  the  other  direc- 
tors wish  it,  re-elected  after  a  year.  Such  has 
been  the  unbroken  practice  of  many  years,  and 
it  would  be  hardly  possible  now  to  break  it.  When 
a  vacancy  occurs  by  death  or  resignation,  the 
whole  board  chooses  the  new  member,  and  they 
do  it,  as  I  am  told,  with  great  care.  For  a  peculiar 
reason,  it  is  important  that  the  directors  should  be 
young  when  they  begin ;  and  accordingly  the  board 
run  over  the  names  of  the  most  attentive  and  pi  o- 


THE    GOVERNMENT  OF   THE  BANK. 


2O9 


mising  young  men  in  the  old-established  firms  of 
London,  and  select  the  one  who,  they  think,  will 
be  most  suitable  for  a  bank  director.  There  is  a 
considerable  ambition  to  fill  the  office.  The  status 
which  is  given  by  it,  both  to  the  individual  who 
fills  it  and  to  the  firm  of  merchants  to  which  he 
belongs,  is  considerable.  There  is  surprisingly 
little  favour  shown  in  the  selection  ;  there  is  a 
great  wish  on  the  part  of  the  Bank  directors  for  the 
time  being  to  provide,  to  the  best  of  their  ability, 
for  the  •  future  good  government  of  the  Bank. 
Very  few  selections  in  the  world  are  made  with 
nearly  equal  purity.  There  is  a  sincere  desire  to 
do  the  best  for  the  Bank,  and  to  appoint  a  well- 
conducted  young  man  who  has  begun  to  attend 
to  business,  and  who  seems  likely  to  be  fairly 
sensible  and  fairly  efficient  twenty  years  later. 

The  age  is  a  primary  matter.  The  offices  of 
Governor  and  Deputy-Governor  are  given  in 
rotation.  The  Deputy-Governor  always  succeeds 
the  Governor,  and  usually  the  oldest  director  who 
has  not  been  in  office  becomes  Deputy-Governor. 
Sometimes,  from  personal  reasons,  such  as  ill- 
health  or  special  temporary  occupation,  the  time 
at  which  a  director  becomes  Deputy-Governor 
may  be  a  little  deferred,  and,  in  some  few  cases, 
merchants  in  the  greatest  business  have  been  per- 


2io  THE    GOVERNMENT  OF   THE  BANK. 

mitted  to  decline  entirely.  But  for  all  general 
purposes,  the  rule  may  be  taken  as  absolute. 
Save  in  rare  cases,  a  director  must  serve  his  time 
as  Governor  and  Deputy-Governor  nearly  when 
his  turn  comes,  and  he  will  not  be  asked  to  serve 
much  before  his  turn.  It  is  usually  about  twenty 
years  from  the  time  of  a  man's  first  election  that 
he  arrives,  as  it  is  called,  at  the  chair.  And  as 
the  ofHces  of  Governor  and  Deputy-Governor  are 
very  important,  a  man  who  fills  them  should  be 
still  in  the  vigour  of  life.  Accordingly,  Bank 
directors,  when  first  chosen  by  the  board,  are 
always  young  men. 

At  first  this  has  rather  a  singular  effect ;  a 
stranger  hardly  knows  what  to  make  of  it.  Many 
years  since,  I  remember  seeing  a  very  fresh  and 
nice-looking  young  gentleman,  and  being  struck 
with  astonishment  at  being  told  that  he  was  a 
director  of  the  Bank  of  England.  I  had  always 
imagined  such  directors  to  be  men  of  tried  sagac- 
ity and  long  experience,  and  I  was  amazed  that  a 
cheerful  young  man  should  be  one  of  them.  I 
believe  I  thought  it  was  a  little  dangerous.  I 
thought  such  young  men  could  not  manage  the 
Bank  well.  I  feared  they  had  the  power  to  do 
mischief. 

Further  inquiry,  however  soon  convinced  me 


THE   GOVERNMENT  OF   7 HE  BANK.  2ll 

that  they  had  not  the  power.  Naturally,  young 
men  have  not  much  influence  at  a  board  where 
there  are  many  older  members.  And  in  the  Bank 
of  England  there  is  a  special  provision  for  depriv- 
ing them  of  it  if  they  get  it.  Some  of  the  directors, 
as  I  have  said,  retire  annually,  but  by  courtesy  it 
is  always  the  young  ones.  Those  who  have  passed 
the  chair — that  is,  who  have  served  the  office  of 
Governor — always  remain.  The  young  part  of 
the  board  is  the  fluctuating  part,  and  the  old  part 
is  die  permanent  part ;  and  therefore  it  is  not  sur- 
prising that  the  young  part  has  little  influence. 
The  Bank  directors  may  be  blamed  for  many  things, 
but  they  cannot  be  blamed  for  the  changeableness 
and  excitability  of  a  neocracy. 

Indeed,  still  better  to  prevent  it,  the  elder 
members  of  the  board — that  is,  those  who  have 
passed  the  chair — form  a  standing  committee  of 
indefinite  powers,  which  is  called  the  Committee 
of  Treasury.  I  say  '  indefinite  powers/  for  I  am 
not  aware  that  any  precise  description  has  ever 
been  given  of  them,  and  I  doubt  if  they  can  be 
precisely  described.  They  are  sometimes  said  to  ex- 
ercise a  particular  control  over  the  relations  and  ne- 
gotiations between  the  Bank  and  the  Government 
But  I  confess  that  I  believe  that  this  varies  very 
much  with  the  character  of  the  Governor  for  the 


212  THE    GOVERNMENT  OF   THE  BANK. 

time  being.  A  strong  Governor  does  much  mainly 
upon  his  own  responsibility,  and  a  weak  Governor 
does  little.  Still  the  influence  of  the  Committee 
of  Treasury  is  always  considerable,  though  not 
always  the  same.  They  form  a  cabinet  of  mature 
declining,  and  old  men,  just  close  to  the  execu- 
tive ;  and  for  good  or  evil  such  a  cabinet  must  have 
much  power. 

By  old  usage,  the  directors  of  the  Bank  of  Eng- 
land cannot  be  themselves  by  trade  bankers.  This 
is  a  relic  of  old  times.  Every  bank  was  supposed  to 
be  necessarily,  more  or  less,  in  opposition  to  every 
other  bank — banks  in  the  same  place  to  be  espec- 
ially in  opposition.  In  consequence,  in  London, 
no  banker  has  a  chance  of  being  a  Bank  director, 
or  would  ever  think  of  attempting  to  be  one. 
I  am  here  speaking  of  bankers  in  the  English 
sense,  and  in  the  sense  that  would  surprise  a 
foreigner.  One  of  the  Rothschilds  is  on  the  Bank 
direction,  and  a  foreigner  would  be  apt  to  think 
that  they  were  bankers  if  any  one  was.  But  this 
only  illustrates  the  essential  difference  between 
our  English  notions  of  banking  and  the  continental. 
Ours  have  attained  a  much  fuller  development 
than  theirs.  Messrs.  Rothschild  are  immense 
Capitalists,  having,  doubtless,  much  borrowed 
money  in  their  hands.  But  they  do  not  take  ioo/ 


THE    GOVERNMENT  OF   THE  BANK.  21 3 

payable  on  demand,  and  pay  it  back  in  cheques  of 
5/.  each,  and  that  is  our  English  banking.  The 
borrowed  money  which  they  have  is  in  large  sums, 
borrowed  for  terms  more  or  less  long.  English 
bankers  deal  with  an  aggregate  of  small  sums,  all 
of  which  are  repayable  on  short  notice,  or  on 
demand.  And  the  way  the  two  employ  their 
money  is  different  also.  A  foreigner  thinks  '  an 
Exchange  business ' — that  is,  the  buying  and 
selling  bills  on  foreign  countries — a  main  part 
of  banking.  As  I  have  explained,  remittance  is 
one  of  the  subsidiary  conveniences  which  early 
banks  subserve  before  deposit  banking  begins. 
But  the  mass  of  English  country  bankers  only  give 
bills  on  places  in  England  or  on  London,  and  in 
London  the  principal  remittance  business  has 
escaped  out  of  the  hands  of  the  bankers.  Most  of 
them  would  not  know  how  to  carry  through  a  great 
'  Exchange  operation/  or  to  '  bring  home  the 
returns.'  They  would  as  soon  think  of  turning- 
silk  merchants.  The  Exchange  trade  is  carried  on 
by  a  small  and  special  body  of  foreign  bill-brokers, 
of  whom  Messrs.  Rothschild  are  the  greatest.  One 
of  that  firm  may,  therefore,  well  be  on  the  Bank 
direction,  notwithstanding  the  rule  forbidding 
bankers  to  be  there,  for  he  and  his  family  are  not 
English  bankers,  either  by  the  terms  on  which 


214  THE    GOVERNMENT  OF   THE  BANK. 

they  borrow  money,  or  the  mode  in  which  they 
employ  it.  But  as  to  bankers  in  the  English 
sense  of  the  word,  the  rule  is  rigid  and  absolute. 
Not  only  no  private  banker  is  a  director  of  the 
Bank  of  England,  but  no  director  of  any  joint 
stock  bank  would  be  allowed  to  become  such.  The 
two  situations  would  be  taken  to  be  incompatible. 
The  mass  of  the  Bank  directors  are  merchants 
of  experience,  employing  a  considerable  capita) 
in  trades  in  which  they  have  been  brought  up, 
and  with  which  they  are  well  acquainted.  Many 
of  them  have  information  as  to  the  present  course 
of  trade,  and  as  to  the  character  and  wealth  of 
merchants,  which  is  most  valuable,  or  rather  is  all 
but  invaluable,  to  the  Bank.  Many  of  them,  too, 
are  quiet,  serious  men,  who,  by  habit  and  nature, 
watch  with  some  kind  of  care  every  kind  of 
business  in  which  they  are  engaged,  and  give  an 
anxious  opinion  on  it.  Most  of  them  have  a 
good  deal  of  leisure,  for  the  life  of  a  man  of 
business  who  employs  only  his  own  capital,  and 
employs  it  nearly  always  in  the  same  way,  is  by 
no  means  fully  employed.  Hardly  any  capital  is 
enough  to  employ  the  principal  partner's  time, 
and  if  such  a  man  is  very  busy,  it  is  a  sign  of 
something  wrong.  Either  he  is  working  at  detail, 
which  subordinates  would  do  better,  and  which 


THE   GOVERNMENT  OF   THE  BA\K.  21$ 

he  had  better  leave  alone,  or  he  is  engaged  in  too 
many  speculations,  is  incurring  more  liabilities 
than  his  capital  will  bear,  and  so  may  be  ruined. 
]n  consequence,  every  commercial  city  abounds 
in  men  who  have  great  business  ability  and  ex- 
perience, who  are  not  fully  occupied,  who  wish  to 
be  occupied,  and  who  are  very  glad  to  become 
directors  of  public  companies  in  order  to  be  occu- 
pied. The  direction  of  the  Bank  of  England  has, 
for  many  generations,  been  composed  of  such  men. 
Such  a  government  for  a  joint  stock  company  is 
very  good  if  its  essential  nature  be  attended  to,  and 
very  bad  if  that  nature  be  not  attended  to.  That 
government  is  composed  of  men  with  a  high  averge 
of  general  good  sense,  with  an  excellent  knowledge 
of  business  in  general,  but  without  any  special 
knowledge  of  the  particular  business  in  which  they 
are  engaged.  Ordinarily,  in  joint  stock  banks  and 
companies  this  deficiency  is  cured  by  the  selection 
of  a  manager  of  the  company,  who  has  been  speci- 
ally trained  to  that  particular  trade,  and  who  en- 
gages to  devote  all  his  experience  and  all  his  ability 
to  the  affairs  of  the  company.  The  directors,  and 
often  a  select  committee  of  them  more  especially, 
consult  with  the  manager,  and  after  hearing  what 
he  has  to  say,  decide  on  the  affairs  of  the  company. 
There  is  in  all  ordinary  joint:  stock  companies  a 


2i6  THE    GOVERNMENT  OF   THE  BANK. 

fixed  executive  specially  skilled,  and  a  somewhat 
varying  council  not  specially  skilled.  The  fixed 
manager  ensures  continuity  and  experience  in  the 
management,  and  a  good  board  of  directors 
ensures  general  wisdom. 

But  in  the  Bank  of  England  there  is  no  fixed 
executive.  The  Governor  and  Deputy-Governor, 
who  form  that  executive,  change  every  two  years. 
I  believe,  indeed,  that  such  was  not  the  original 
intention  of  the  founders.  In  the  old  days  of  few 
and  great  privileged  companies,  the  chairman, 
though  periodically  elected,  was  practically  perma- 
nent so  long  as  his  policy  was  popular.  He  was 
the  head  of  the  ministry,  and  ordinarily  did  not 
change  unless  the  opposition  came  in.  But  this 
idea  has  no  present  relation  to  the  constitution 
of  the  Bank  of  England.  At  present,  the  Gov- 
ernor and  Deputy-Governor  almost  always  change 
at  the  end  of  two  years  ;  the  case  of  any  longer 
occupation  of  the  chair  is  so  very  rare,  that  it 
need  not  be  taken  account  of.  And  the  Governor 
and  Deputy-Governor  of  the  Bank  cannot  well  be 
shadows.  They  are  expected  to  be  constantly 
present ;  to  see  all  applicants  for  advances  out  of 
the  ordinary  routine ;  to  carry  on  the  almost 
continuous  correspondence  between  the  Bank  and 
its  largest  customer — the  Government ;  to  bring 


THE    GOVERNMENT  OF   THE  BANK. 

all  necessary  matters  before  the  board  of  directors 
or  the  Committee  of  Treasury, — in  a  word,  to 
do  very  much  of  what  falls  to  the  lot  of  the 
manager  in  most  companies.  Under  this  shifting 
ihief  executive,  there  are  indeed  very  valuable 
heads  of  departments.  The  head  of  the  Discount 
Department  is  especially  required  to  be  a  man  of 
ability  and  experience.  But  these  officers  are 
essentially  subordinate  ;  no  one  of  them  is  like 
the  general  manager  of  an  ordinary  bank— 
the  head  of  all  action.  The  perpetually  present 
executive — the  Governor  and  Deputy-Governor 
—make  it  impossible  that  any  subordinate  should 
have  that  position.  A  really  able  and  active- 
minded  Governor,  being  required  to  sit  all  day  in 
the  bank,  in  fact  does,  and  can  hardly  help  doing, 
its  principal  business. 

In  theory,  nothing  can  be  worse  than  this  gov- 
ernment for  a  bank — a  shifting  executive  ;  a  board 
of  directors  chosen  too  young  for  it  to  be  known 
whether  they  are  able ;  a  committee  of  manage- 
ment, in  which  seniority  is  the  necessary  qualifi- 
cation, and,  old  age  the  common  result ;  and  no 
trained  bankers  anywhere. 

Even  if  the  Bank  of  England  were  an  ordinary 
bank,  such  a  constitution  would  be  insufficient ;  but 
its  inadequacy  is  greater,  and  the    consequences 
10 


2i8  THE    GOVERNMENT  OF   THE   BANK. 

of  lhat  inadequacy  far  worse,  because  of  its 
greater  functions.  The  Bank  of  England  has  to 
keep  the  sole  banking  reserve  of  the  country  ; 
has  to  keep  it  through  all  changes  of  the  money 
market,  and  all  turns  of  the  Exchanges ;  has  to 
decide  on  the  instant  in  a  panic  what  sort  of 
advances  should  be  made,  to  what  amounts,  and 
for  what  dates; — and  yet  it  has  a  constitution 
plainly  defective.  So  far  from  the  government  of 
the  Bank  of  England  being  better  than  that  of 
any  other  bank — as  it  ought  to  be,  considering 
that  its  functions  are  much  harder  and  graver — 
any  one  would  be  laughed  at  who  proposed  it  as 
a  model  for  the  government  of  a  new  bank ;  and 
that  government,  if  it  were  so  proposed,  would 
on  all  hands  be  called  old-fashioned,  and  curious. 
As  was  natural,  the  effects — good  and  evil — of 
its  constitution  are  to  be  seen  in  every  part  of  the 
Bank's  history.  On  one  vital  point  the  Bank's 
management  has  been  excellent.  It  has  done 
perhaps  less  '  bad  business,'  certainly  less  very 
bad  business,  than  any  bank  of  the  same  size  and 
the  same  age.  In  all  its  history  I  do  not  know 
that  its  name  has  ever  been  connected  with  a 
single  large  and  discreditable  bad  debt.  There 
has  never  been  a  suspicion  that  it  was  '  worked ' 
for  the  benefit  of  anyone  man,  or  any  combination 


THE    GOVERNMENT  OF   THE  BANK.  219 

of  men.  The  great  respectability  of  the  directors, 
and  the  steady  attention  many  of  them  have 
always  given  the  business  of  the  Bank,  have  kept 
it  entirely  free  from  anything  dishonorable  and 
discreditable.  Steady  merchants  collected  in 
council  are  an  admirable  judge  of  bills  and 
securities.  They  always  know  the  questionable 
standing  of  dangerous  persons  ;  they  are  quick  to 
note  the  smallest  signs  of  corrupt  transations  ; 
and  no  sophistry  will  persuade  the  best  of  them 
out  of  their  good  instincts.  You  could  not  have 
made  the  directors  of  the  Bank  of  England  do 
the  sort  of  business  which  '  Overends '  at  last  did, 
except  by  a  moral  miracle — except  by  changing 
their  nature.  And  the  fatal  career  of  the  Bank 
of  the  United  States  would,  under  their  manage- 
ment, have  been  equally  impossible.  Of  the 
ultimate  solvency  of  the  Bank  of  England,  or  of 
the  eventual  safety  of  its  vast  capital,  even  at  the 
worst  periods  of  its  history,  there  has  not  been 
the  least  doubt. 

But  nevertheless,  as  we  have  seen,  the  policy 
of  the  Bank  has  frequently  been  deplorable,  and 
at  such  times  the  defects  of  its  government  have 
aggravated  if  not  caused  its  calamities. 

In  truth  the  executive  of  the  Bank  of  England 
is  now  much  such  as  the  executive  of  n  public 


220  THE    GOVERNMENT  OF   THE  BANK. 

department  of  the  Foreign  Office  or  the  Home 
Office  would  be  in  which  there  was  no  respon- 
sible permanent  head.     In  these  departments  of 
Government,    the    actual   chief   changes    nearly, 
though  not  quite,   as  often  as  the  Governor  of 
the  Bank  of  England.    The  Parliamentary  Under- 
secretary— the  Deputy-Governor,  so  to  speak,  of 
that  office — changes  nearly  as  often.     And  if  the 
administration  solely,  or  in  its   details,  depended 
on  these  two,  it  would  stop,     New  men  could  not 
carry  it  on  with  vigour  and  efficiency  ;  indeed  they 
could  not  carry  it  on  at  all.     But,  in  fact,  they  are 
assisted  by  a  permanent  Under-Secretary,  who 
manages  all  the  routine  business,  who  is  the  de 
pository  of  the  secrets  of  the  office,  who  embodies 
its  traditions,  who  is  the  hyphen  between  changing 
administrations.    In  consequence  of  this  assistance 
the  continuous  business  of  the  department  is,  foi 
the  most  part,  managed  sufficiently  well,  notwith- 
standing frequent  changes  in  the  heads  of  adminis- 
tration.    And  it  is  only  by  such  assistance  thai 
such  business  could  be  so  managed.    The  presenl 
administration  of  the  Bank  is  an  attempt  to  man 
age  a  great,  a  growing,  and  a  permanently  continu- 
ous business  without  an  adequate  permanent  ele- 
ment, and  a  competent  connecting  link. 

In  answer,  it  may  be  said  that  the  duties  which 


THE    GOVERNMENT  OF   THE  BANK.  221 

press  on  the  Governor  and  Deputy-Governor  of 
the  Bank  are  not  so  great  or  so  urgent  as  thos* 
which  press  upon  the  heads  of  official  departments. 
And  perhaps,  in  point  of  mere  labour,  the  Gover- 
nor of  the  Bank  has  the  advantage.  Banking  never 
ought  to  be  an  exceedingly  laborious  trade.  There 
must  be  a  great  want  of  system  and  a  great  defi- 
ciency in  skilled  assistance  if  extreme  labour  is  v 
thrown  upon  the  chief.  But  in  importance,  the 
functions  of  the  head  of  the  Bank  rank  as  high  as 
those  of  any  department.  The  cash  reserve  of  the 
country  is  as  precious  a  deposit  as  any  set  of  men 
can  have  the  care  of.  And  the  difficulty  of  deal- 
ing with  a  panic  (as  the  administration  of  the  Bank 
is  forced  to  deal  with  it)  is  perhaps  a  more  formid- 
able instant  difficulty  than  presses  upon  any  single 
minister.  At  any  rate,  it  comes  more  suddenly, 
and  must  be  dealt  with  more  immediately,  than 
most  comparable  difficulties  ;  and  the  judgment, 
the  nerve,  and  the  vigour  needful  to  deal  with  it 
are  plainly  rare  and  great. 

The  natural  remedy  would  be  to  appoint 
a  permanent  Governor  of  the  Bank.  Nor,  as  I 
have  said,  can  there  be  much  doubt  that  such  was 
the  intention  of  its  founders.  All  the  old  com- 
panies which  have  their  beginning  in  the  seven- 
teenth century  had  the  same  constitution,  and 


222  THE    GOVERNMENT  OF    THE  BANfC 

those  of  them  which  have  lingered  down  to  our 
time  retain  it.  The  Hudson's  Bay  Company, 
the  South  Sea  Company,  the  East  India  Company, 
were  all  founded  with  a  sort  of  sovereign  executive, 
intended  to  be  permanent,  and  intended  to  be 
efficient.  This  is,  indeed,  the  most  natural  mode 
of  forming  a  company  in  the  minds  of  those  to 
whom  companies  are  new.  Such  persons  will  have 
always  seen  business  transacted  a  good  deal  des- 
potically ;  they  will  have  learnt  the  value  of  prompt 
decision  and  of  consistent  policy;  they  will  have 
often  seen  that  business  is  best  managed  when 
those  who  are  conducting  it  could  scarcely  justify 
the  course  they  are  pursuing  by  distinct  argument 
which  others  could  understand.  All  'city'  people 
make  their  money  by  investments,  for  which  there 
are  often  good  argumentative  reasons  ;  but  they 
would  hardly  ever  be  able,  if  required  before  a 
Parliamentary  committee,  to  state  those  reasons. 
They  have  become  used  to  act  on  them  without 
distinctly  analysing  them,  and,  in  a  monarchical 
way,  with  continued  success  only  as  a  test  of  their 
goodness.  Naturally  such  persons,  when  proceed- 
ing to  form  a  company,  make  it  upon  the  model  oi 
that  which  they  have  been  used  to  see  successful. 
They  prov  ide  for  the  executive  first  and  above  all 
things.  How  r^iicli  this  was  in  the  minds  of  the 


THE    GOVERNMENT  OF   THE  BANK.  223 

founders  of  the  Bank  of  England  may  be  judged 
of  by  the  name  which  they  gave  it.  Its  corporate 
name  is  the  'Governor  and  Company  of  the  Bank 
of  England.'  So  important  did  the  founders 
think  the  executive  that  they  mentioned  it  dis- 
tinctly, and  mentioned  it  first. 

And  not  only  is  this  constitution  of  a  company 
the  most  natural  in  the  early  days  when  compa- 
nies were  new,  it  is  also  that  which  experience 
has  shown  to  be  the  most  efficient  now  that  com- 
panies have  long  been  tried.  Great  railway  com- 
panies are  managed  upon  no  other.  Scarcely  any 
instance  of  great  success  in  a  railway  can  be  men- 
tioned in  which  the  chairman  has  not  been  an 
active  and  judicious  man  of  business,  constantly 
attending  to  the  affairs  of  the  company.  A  thou- 
sand instances  of  railway  disaster  can  be  easily 
found  in  which  the  chairman  was  only  a  nominal 
head — a  nobleman,  or  something  of  that  sort- 
chosen  for  show.  '  Railway  chairmanship '  has 
become  a  profession,  so  much  is  efficiency  valued 
in  it,  and  so  indispensable  has  ability  been  found 
to  be.  The  plan  of  appointing  a  permanent 
'  chairman  '  at  the  Bank  of  England  is  strongly 
supported  by  much  modern  experience. 

Nevertheless,  I  hesitate  as  to  its  expediency;  at 
any  rate,  there  are  other  plans  which,  for  several 


224 


THE    GOVERNMENT   OF    THE  BANK. 


reasons,  should,  I  think,  first  be  tried  in  prefer 
ence. 

First.  This  plan  would  be  exceedingly  unpopular, 
A  permanent  Governor  of  the  Bank  of  England 
would  be  one  of  the  greatest  men  in  England.  He 
would  be  a  little  '  monarch '  in  the  City  ;  he  would 
be  far  greater  than  the  '  Lord  Mayor/  He  would 
be  the  personal  embodiment  of  the  Bank  of  Eng- 
land ;  he  would  be  constantly  clothed  with  an 
almost  indefinite  prestige.  Everybody  in  business 
would  bow  down  before  him  and  try  to  stand  well 
with  him,  for  he  might  in  a  panic  be  able  to  save 
almost  anyone  he  liked,  and  to  ruin  almost  anyone 
he  liked.  A  day  might  come  when  his  favour 
might  mean  prosperity,  and  his  distrust  might  mean 
ruin.  A  position  with  so  much  real  power  and 
so  much  apparent  dignity  would  be  intensely 
coveted.  Practical  men  would  be  apt  to  say  that 
it  was  better  than  the  Prime  Ministership,  for  it 
would  last  much  longer,  and  would  have  a  greater 
jurisdiction  over  that  which  practical  men  would 
most  value, — over  money.  At  all  events,  such  a 
Governor,  if  he  understood  his  business,  might 
make  the  fortunes  of  fifty  men  where  the  Prime 
Minister  can  make  that  of  one.  Scarcely  anything 
could  be  more  unpopular  in  the  City  than  the 
appointment  of  a  little  king  to  reign  over  them. 


THE    GOVERNMENT    OF   THE  BANK.  22$ 

Secondly.  I  do  not  believe  that  we  should 
always  get  the  best  man  for  the  post ;  often  1  -•/ 
foai  that  we  should  not  even  get  a  tolerable  man. 
There  are  many  cases  in  which  the  offer  of  too 
high  a  pay  would  prevent  our  obtaining  the  man 
\ve  wish  for,  and  this  is  one  of  them.  A  very 
high  pay  of  prestige  is  almost  always  very 
dangerous.  It  causes  the  post  to  be  desired  by 
vain  men,  by  lazy  men,  by  men  of  rank  ;  and 
when  that  post  is  one  of  real  and  technical  busi- 
ness, and  when,  therefore,  it  requires  much  pre- 
vious training,  much  continuous  labour,  and  much 
patient  and  quick  judgment,  all  such  men  are 
dangerous.  But  they  are  sure  to  covet  all  posts 
of  splendid  dignity,  and  can  only  be  kept  out  of 
them  with  the  greatest  difficulty.  Probably,  in 
every  Cabinet  there  are  still  some  members  (in 
the  days  of  the  old  close  boroughs  there  were 
many)  whose  posts  have  come  to  them  not  from 
personal  ability  or  inherent  merit,  but  from  their 
rank,  their  wealth,  or  even  their  imposing  exterior. 
The  highest  political  offices  are,  indeed,  kept  clear 
of  such  people,  for  in  them  serious  and  important 
duties  must  constantly  be  performed  in  the  face 
of  the  world.  A  Prime  Minister,  or  a  Chancellor 
of  the  Exchequer,  or  a  Secretary  of  State  must 
explain  his  policy  and  defend  his  actions  in 
10* 


>26  THE    GOVERNMENT  OF    THE  BANK. 

Parliament,  and  the  discriminating  tact  of  a  critical 
assembly — abounding  in  experience,  and  guided 
by  tradition — will  soon  discover  what  he  is.  But 
the  Governor  of  the  Bank  would  only  perform 
quiet  functions,  which  look  like  routine,  though 
they  are  not,  in  which  there  is  no  immediate  risk 
of  success  or  failure  ;  which  years  hence  may 
indeed  issue  in  a  crop  of  bad  debts,  but  which 
any  grave  persons  may  make  at  the  time  to  look 
fair  and  plausible.  A  large  Bank  is  exactly  the 
place  where  a  vain  and  shallow  person  in  authority, 
if  he  be  a  man  of  gravity  and  method,  as  such 
men  often  are,  may  do  infinite  evil  in  no  long 
time,  and  before  he  is  detected.  If  he  is  lucky 
enough  to  begin  at  a  time  of  expansion  in  trade, 
he  is  nearly  sure  not  to  be  found  out  till  the  time 
of  contraction  has  arrived,  and  then  very  large 
figures  will  be  required  to  reckon  the  evil  he  has 
done. 

And  thirdly, — I  fear  that  the  possession  of  such 
patronage  would  ruin  any  set  of  persons  in  whose 
gift  it  was.  The  election  of  the  Chairman  must  be 
placed  either  in  the  court  of  proprietors  or  that 
of  the  directors.  If  the  proprietors  choose,  there 
will  be  something  like  the  evils  of  an  American 
presidential  election.  Bank  stock  will  be  bought 
in  order  to  confer  the  qualification  of  voting  at  the 


THE    GOVERNMENT   OF   THE   BANK.  22? 

election  of  the  '  chief  of  the  City/  The  Chairman, 
when  elected,  may  well  find  that  his  most  active 
supporters  are  large  borrowers  of  the  Bank,  and 
he  may  well  be  puzzled  to  decide  between  his 
duty  to  the  Bank  and  his  gratitude  to  those  who 
chose  him.  Probably,  if  he  be  a  cautious  man 
of  average  ability,  he  will  combine  both  evils  ;  he 
will  not  lend  so  much  money  as  he  is  asked  for, 
and  so  will  offend  his  own  supporters  ;  but  will 
lend  some  which  will  be  lost,  and  so  the  profits  of 
the  Bank  will  be  reduced.  A  large  body  of  Bank 
proprietors  would  make  but  a  bad  elective  body 
for  an  office  of  great  prestige ;  they  would  not; 
commonly  choose  a  good  person,  and  the  person 
they  did  choose  would  be  bound  by  promises  that 
would  make  him  less  good. 

The  court  of  directors  would  choose  better ;  a 
small  body  of  men  of  business  would  not  easily 
be  persuaded  to  choose  an  extremely  unfit  man. 
But  they  would  not  often  choose  an  extremely 
good  man.  The  really  best  man  would  probably 
not  be  so  rich  as  the  majority  of  the  directors, 
nor  of  so  much  standing,  and  not  unnaturally 
they  would  much  dislike  to  elevate  to  the  head- 
ship of  the  City,  one  who  was  much  less  in  the 
estimation  of  the  City  than  themselves.  And  they 
would  be  canvassed  in  every  way  and  on  every 


THE    GOVERNMENT  OP    THE  BANK. 

side  to  appoint  a  man  of  mercantile  dignity  or 
mercantile  influence.  Many  people  of  the  greatest 
prestige  and  rank  in  the  City  would  covet  so  great 
a  dignity,  if  not  for  themselves,  at  least  for  some 
friend,  or  some  relative,  and  so  the  directors 
would  be  set  upon  from  every  side. 

An  election  so  liable  to  be  disturbed  by  power- 
ful vitiating  causes  would  rarely  end  in  a  good 
choice.  The  best  candidate  would  almost  never 
be  chosen  ;  often,  I  fear,  one  would  be  chosen 
altogether  unfit  for  a  post  so  important.  And  the 
excitement  of  so  keen  an  election  would  altogether 
disturb  the  quiet  of  the  Bank.  The  good  and 
efficient  working  of  a  board  of  Bank  directors 
depends  on  its  internal  harmony,  and  that  harmony 
would  be  broken  for  ever  by  the  excitement,  the 
sayings,  and  the  acts  of  a  great  election.  The 
board  of  directors  would  almost  certainly  be 
demoralised  by  having  to  choose  a  sovereign, 
and  there  is  no  certainty,  nor  any  great  likeli- 
hood, indeed,  that  they  would  choose  a  good  one. 
In  France  the  difficulty  of  finding  a  good  body 
to  choose  the  Governor  of  the  Bank  has  been 
met  characteristically.  The  Bank  of  France 
keeps  the  money  of  the  State,  and  the  State 
appoints  its  governor.  The  French  have  gene- 
rally a  logical  reason  to  give  for  all  they  do, 


THE   GOVERNMENT  OF   THE  BANK.  22g 

though  perhaps  the  results  of  their  actions  are  not 
always  so  good  as  the  reasons  for  them.  The 
Governor  of  the  Bank  of  France  has  not  always, 
I  am  told,  been  a  very  competent  person  ;  the 
Sub-Governor,  whom  the  State  also  appoints,  is, 
as  we  might  expect,  usually  better.  But  for  our 
English  purposes  it  would  be  useless  to  inquire 
minutely  into  this.  No  English  statesman  would 
consent  to  be  responsible  for  the  choice  of  the 
Governor  of  the  Bank  of  England.  After  every 
panic,  the  Opposition  would  say  in  Parliament 
that  the  calamity  had  been '  grievously  aggravated, ' 
if  not  wholly  caused,  by  the  '  gross  misconduct '  of 
the  Governor  appointed  by  the  ministry.  Or, 
possibly,  offices  may  have  changed  occupants  and 
the  ministry  in  power  at  the  panic  would  be  the 
opponents  of  the  ministry  which  at  a  former  time 
appointed  the  Governor.  In  that  case  they 
would  be  apt  to  feel,  and  to  intimate,  a  '  grave 
regret '  at  the  course  which  the  nominee  of  their 
adversaries  had  '  thought  it  desirable  to  pursue.' 
They  would  not  much  mind  hurting  his  feel 
ings,  and  if  he  resigned  they  would  have  them- 
selves a  valuable  piece  of  patronage  to  confer  on 
one  of  their  own  friends.  No  result  could  be 
worse  than  that  the  conduct  of  the  Bank  and  the 
management  should  be  made  a  matter  of  party 


230  THE    GOVERNMENT  OF   THE  BANK. 

politics,  and  men  of  all  parties  would  agree  in 
this,  even  if  they  agreed  in  almost  nothing  else. 

I  am  therefore  afraid  that  we  must  abandon  the 
plan  of  improving  the  government  of  the  Bank  ol 
England  by  the  appointment  of  a  permanent 
Governor,  because  we  should  not  be  sure  of  choos- 
ing a  good  governor,  and  should  indeed  run  a  great 
risk,  for  the  most  part,  of  choosing  a  bad  one. 

I  think,  however,  that  much  of  the  advantage, 
with  little  of  the  risk,  might  be  secured  by  a 
humbler  scheme.  In  English  political  offices,  as  was 
observed  before,  the  evil  of  a  changing  head  is  made 
possible  by  the  permanence  of  a  dignified  subor- 
dinate. Though  the  Parliamentary  Secretary  of 
State  and  the  Parliamentary  Under-Secretarygoin 
and  out  with  each  administration,  another  Under- 
secretary remains  through  all  such  changes,  and 
is  on  that  account  called  'permanent.'  Now  this 
system  seems  to  me  in  its  principle  perfectly  applic- 
able to  the  administration  of  the  Bank  of  England. 
For  the  reasons  which  have  just  been  given,  a  per- 
manent ruler  of  the  Bank  of  England  cannot  be 
appointed  ;  for  other  reasons,  which  were  just  be- 
fore given,  some  most  influential  permanent  func- 
tionary is  essential  in  the  proper  conduct  of  the 
business  of  the  Bank  ;  and,  mutatis  mutandis, 
these  are  the  very  difficulties,  and  the  very  ad  van  t- 


THE    GOVERNMENT  OF   THE  BANK:.  331 

age<=  v/hi-ch  have  led  us  to  frame  our  principal 
offices  of  state  in  the  present  fachion. 

Such  a  Deputy-Governor  would  not  be  at  all  a 
'king'  in  the  City.  There  would  be  no  mischievous 
prestige  about  the  office  ;  there  would  be  no  attrac- 
tion  in  it  for  a  vain  man ;  and  there  would  be  no- 
thing to  make  it  an  object  of  a  violent  canvass  or  of 
unscrupulous  electioneering.  The  office  would  be 
essentially  subordinate  in  its  character,  just  like 
the  permanent  secretary  in  a  political  office.  The 
pay  should  be  high,  for  good  ability  is  wanted — but 
no  pay  would  attract  the  most  dangerous  class  of 
people.  The  very  influential,  but  not  very  wise, 
City  dignitary  who  would  be  so  very  dangerous  is 
usually  very  opulent ;  he  would  hardly  have  such 
influence  if  he  were  not  opulent :  what  he  wants 
is  not  money,  but  '  position.'  A  Governorship  of 
the  Bank  of  England  he  would  take  almost  with- 
out salary ;  perhaps  he  would  even  pay  to  get  it : 
but  a  minor  office  of  essential  subordination  \voulcl 
not  attract  him  at  all.  We  may  augment  the 
pay  enough  to  get  a  good  man,  without  fearing 
that  by  such  pay  we  may  tempt — as  by  social 
privilege  we  should  tempt — exactly  the  sort  of 
man  we  do  not  want. 

Undoubtedly  such  a  permanent  official  should 
be  a  trained  banker.  There  is  a  cardinal  difference 


THE    GOVERNMENT  OF   THE  BANK. 

between  banking  and  other  kinds  of  commerce ;  yofc 
can  affui  d  to  run  much  less  risk  in  banking  than  in 
commerce,  and  you  must  take  much  greater  precau- 
tions. In  common  business,  the  trader  can  add  to  the. 
cost  price  of  the  goods  he  sells  a  large  mercantile 
profit,  say  10  to  15  per  cent. ;  but  the  banker  has 
to  be  content  with  the  interest  of  money,  which 
in  England  is  not  so  much  as  5  per  cent,  upon  the 
average.  The  business  of  a  banker  therefore  can- 
not bear  so  many  bad  debts  as  that  of  a  merchant, 
and  he  must  be  much  more  cautious  to  whom 
he  gives  credit.  Real  money  is  a  commodity 
much  more  coveted  than  common  goods :  for 
one  deceit  which  is  attempted  on  a  manufacturer 
or  a  merchant,  twenty  or  more  are  attempted 
on  a  banker.  And  besides,  a  banker,  dealing 
with  the  money  of  others,  and  money  payable 
on  demand,  must  be  always,  as  it  were,  looking 
behind  him  and  seeing  that  he  has  reserve  enough 
in  store  if  payment  should  be  asked  for,  which  a 
merchant  dealing  mostly  with  his  own  capital  need 
not.  think  of.  Adventure  is  the  life  of  commerce, 
but  caution,  I  had  almost  said  timidity,  is  the  life 
of  banking ;  and  I  cannot  imagine  that  the  long 
series  of  great  errors  made  by  the  Bank  of  England 
in  the  management  of  its  reserve  till  after  1857, 
would  have  been  possible  if  the  merchants  in  the 


THE    GOVERNMENT  OF   THE  BANK. 


233 


Bank  court  had  not  erroneously  taken  the  same 
view  of  the  Bank's  business  that  they  must 
properly  take  of  their  own  mercantile  business. 
The  Bank  directors  have  almost  always  been  too 
cheerful  as  to  the  Bank's  business,  and  too  little 
disposed  to  take  alarm.  What  we  want  to  intro- 
duce into  the  Bank  court  is  a  wise  apprehensive- 
ness,  and  this  every  trained  banker  is  taught  by 
the  habits  of  his  trade,  and  the  atmosphere  of  his 
life. 

The  permanent  Governor  ought  to  give  his 
whole  time  to  the  business  of  the  Bank.  He  ought 
to  be  forbidden  to  engage  in  any  other  concern. 
All  the  present  directors,  including  the  Governor 
and  Deputy-Governor,  are  engaged  in  their  own 
business,  and  it  is  very  possible,  indeed  it  must 
perpetually  have  happened,  that  their  own  busi- 
ness as  merchants  most  occupied  the  minds  of 
most  of  them  just  when  it  was  most  important 
that  the  business  of  the  Bank  should  occupy  them. 
1 1  is  at  a  panic  and  just  before  a  panic  that  the 
business  of  the  Bank  is  most  exacting  and  most 
engrossing.  But  just  at  that  time  the  business 
of  most  merchants  must  be  unusually  occupying 
and  may  be  exceedingly  critical.  By  the  present 
constitution  of  the  Bank,  the  attention  of  its  sole 
rulers  is  most  apt  to  be  diverted  from  the  Bank'? 


234  THE    GOVERNMENT  OF   THE  BANK. 

affairs  just  when  those  affairs  require  that  attention 
the  most.  And  the  only  remedy  is  the  appoint- 
ment of  a  permanent  and  influential  man,  who 
will  have  no  business  save  that  of  the  Bank,  and 
who  therefore  presumably  will  attend  most  to  it 
at  the  critical  instant  when  attention  is  most 
required.  His  mind,  at  any  rate,  will  in  a  panic  be 
free  from  pecuniary  anxiety,  whereas  many,  if  not 
all,  of  the  present  directors  must  be  incessantly- 
thinking  of  their  own  affairs  and  unable  to  banish 
them  from  their  minds. 

The  permanent  Deputy-Governor  must  be  a 
director  and  a  man  of  fair  position.  He  must 
not  have  to  say  '  Sir  '  to  the  Governor.  There  is 
no  fair  argument  between  an  inferior  who  has  to 
exhibit  respect  and  a  superior  who  has  to  receive 
respect.  The  superior  can  always,  and  does  mostly, 
refute  the  bad  arguments  of  his  inferior  ;  but  the 
inferior  rarely  ventures  to  try  to  refute  the  bad 
arguments  of  his  superior.  And  he  still  more 
rarely  states  his  case  effectually  ;  he  pauses,  hesi- 
tates, does  not  use  the  best  word  or  the  most  apt 
illustration,  perhaps  he  uses  a  faulty  illustration  or 
a  wrong  word,  and  so  fails  because  the  superior 
immediately  exposes  him.  Important  business 
can  only  be  sufficiently  discussed  by  persons  who 
can  say  very  much  what  they  like  very  much  as 


THE   GOVERNMENT  OF   THE  BANK.  235 

they  like  to  one  another.  The  thought  of  the 
speaker  should  come  out  as  it  was  in  his  mind, 
and  not  be  hidden  in  respectful  expressions  or 
enfeebled  by  affected  doubt.  What  is  wanted  at 
the  Bank  is  not  a  new  clerk  to  the  directors — they 
have  excellent  clerks  of  great  experience  now— 
but  a  permanent  equal  to  the  directors,  who  shall 
be  able  to  discuss  on  equal  terms  with  them  the 
business  of  the  Bank,  and  have  this  advantage 
over  them  in  discussion,  that  he  has  no  other 
business  than  that  of  the  Bank  to  think  of. 

The  formal  duties  of  such  a  permanent  officer 
could  only  be  defined  by  some  one  conversant 
with  the  business  of  the  Bank,  and  could  scarcely 
be  intelligibly  discussed  before  the  public.  Nor 
are  the  precise  duties  of  the  least  importance. 
Such  an  officer,  if  sound,  able,  and  industrious, 
would  soon  rule  the  affairs  of  the  Bank.  He 
would  be  acquainted  better  than  anyone  else,  both 
with  the  traditions  of  the  past  and  with  the  facts 
of  the  present ;  he  would  have  a  great  experience  ; 
he  would  have  seen  many  anxious  times ;  he 
would  always  be  on  the  watch  for  their  recurrence. 
And  he  would  have  a  peculiar  power  of  guidance 
at  such  moments  from  the  nature  of  the  men- with 
whom  he  has  most  to  deal.  Most  Governors  of 
the  Bank  of  England  are  cautious  merchants,  not 


236  THE    GOVERNMENT   OF    THE  BANK. 

profoundly  skilled  in  banking,  but  most  anxious 
that  their  period  of  office  should  be  prosperous 
and  that  they  should  themselves  escape  censure. 
If  a  '  safe '  course  is  pressed  upon  them  they  are 
likely  to  take  that  course.  Now  it  would  almost 
always  be  '  safe '  to  follow  the  advice  of  the  great 
standing  '  authority ' ;  it  would  always  be  most 
'  unsafe '  not  to  follow  it.  If  the  changing 
Governor  act  on  the  advice  of  the  permanent 
Deputy-Governor,  most  of  the  blame  in  case  of 
mischance  would  fall  on  the  latter  ;  it  would  be 
said  that  a  shifting  officer  like  the  Governor 
might  very  likely  not  know  what  should  be  done, 
but  that  the  permanent  official  was  put  there  to 
know  it  and  paid  to  know  it.  But  if,  on  the  other 
hand,  the  changing  Governor  should  disregard 
the  advice  of  his  permanent  colleague,  and  the 
consequence  should  be  bad,  he  would  be  blamed 
exceedingly.  It  would  be  said  that,  '  being  with- 
out experience,  he  had  taken  upon  him  to  overrule 
men  who  had  much  experience  ;  that  when  the 
constitution  of  the  Bank  had  provided  them  with 
skilled  counsel,  he  had  taken  on  himself  to  act  of  his 
own  head,  and  to  disregard  that  counsel ; '  and  so 
on  ad  infinitum.  And  there  could  he  no  sort  ol 
conversation  more  injurious  to  a  man  in  the  City ; 
the  world  there  would  say,  rightly  or  wrongly* 


THE    GOVERNMENT  OF   THE  BANK. 

• 

'  We  must  never  be  too  severe  on  errors  of  judg- 
ment ;  we  are  all  making1  them  every  day ;  ii 
responsible  persons  do  their  best  we  can  expect 
no  more.  But  this  case  is  different :  the  Governoi 
acted  on  a  wrong  system  ;  he  took  upon  himself 
an  unnecessary  responsibility : '  and  so  a  Governor 
who  incurred  disaster  by  disregarding  his  skilled 
counsellor  would  be  thought  a  fool  in  the  City  foi 
ever.  In  consequence,  the  one  skilled  counselloi 
would  in  fact  rule  the  Bank. 

I  believe  that  the  appointment  of  the  new  per- 
manent and  skilled  authority  at  the  Bank  is  the 
greatest  reform  which  can  be  made  there,  and  that 
which  is  most  wanted.  I  believe  that  such  a 
person  would  give  to  the  decision  of  the  Bank  that 
foresight,  that  quickness,  and  that  consistency  in 
which  those  decisions  are  undeniably  now  defi-  V 
cient.  As  far  as  I  can  judge,  this  change  in  the 
constitution  of  the  Bank  is  by  far  the  most  neces- 
sary, and  is  perhaps  more  important  even  than  all 
other  changes.  But,  nevertheless,  we  should  re- 
form the  other  points  which  we  have  seen  to  be 
defective. 

First,  the  London  bankers  should  not  be  alto- 
gether excluded  from  the  court  of  directors.  The 
old  idea,  as  I  have  explained,  was  that  the 
London  bankers  were  the  competitors  of  the  Bank 


238  THE    GOVERNMENT   OF    THE   BANK. 

of  England,  and  would  hurt  it  if  they  could.  But 
now  the  London  bankers  have  another  relation  to 
the  Bank  which  did  not  then  exist,  and  was  not 
then  imagined.  Among  private  people  they  are 
the  principal  depositors  in  the  Bank;  they  are 
therefore  particularly  interested  in  its  stability;  they 
are  especially  interested  in  the  maintenance  of  a 
good  banking  reserve,  for  their  own  credit  and  the 
safety  of  their  large  deposits  depend  on  it.  And 
they  can  bring  to  the  court  of  directors  an  experi- 
ence of  banking  itself,  got  outside  the  Bank  of 
England,  which  none  of  the  present  directors  pos- 
sess, for  they  have  learned  all  they  know  of  bank- 
ing at  the  Bank  itself.  There  was  also  an  old 
notion  that  the  secrets  of  the  Bank  would  be 
divulged  if  they  were  imparted  to  bankers.  But 
probably  bankers  are  better  trained  to  silence  and 
secrecy  than  most  people.  And  there  is  only  a 
thin  partition  now  between  the  bankers  and  the 
secrets  of  the  Bank.  Only  lately  a  firm  failed  of 
which  one  partner  was  a  director  of  the  London 
and  Westminster  Bank,  and  another  a  director  of 
the  Bank  of  England.  Who  can  define  or  class 
the  confidential  communications  of  such  persons 
under  such  circumstances  ? 

As  I  observed  before,  the  line  drawn  at  present 
against  bankers  is  very  technical  and  exclusively 


THE    GOVERNMENT  OF   THE   BANK. 

English.  According  to  continental  ideas,  Messrs. 
Rothschild  are  bankers,  if  any  one  is  a  banker. 
But  the  house  of  Rothschild  is  represented  on 
the  Bank  direction.  And  it  is  most  desirable  that 
it  should  be  represented,  for  members  of  that  firm 
can  give  if  they  choose  confidential  information 
of  great  value  to  the  Bank.  But,  nevertheless,  the 
objection  which  is  urged  against  English  bankers 
is  at  least  equally  applicable  to  these  foreign 
bankers.  They  have,  or  may  have,  at  certain 
periods  an  interest  opposite  to  the  policy  of  the 
Bank.  As  the  greatest  Exchange  dealers,  they 
may  wish  to  export  gold  just  when  the  Bank  of 
England  is  raising  its  rate  of  interest  to  prevent 
anyone  from  exporting  gold.  The  vote  of  a  great 
Exchange  dealer  might  be  objected  to  for  plausible 
reasons  of  contrary  interest,  if  any  such  reasons 
were  worth  regarding.  But  in  fact  the  particular 
interest  of  single  directors  is  not  to  be  regarded  ; 
almost  all  directors  who  bring  special  information 
labour  under  a  suspicion  of  interest ;  they  can 
only  have  acquired  that  information  in  present 
business,  and  such  business  may  very  possibly  be 
affected  for  good  or  evil  by  the  policy  of  the  Bank. 
But  you  must  not  on  this  account  seal  up  the 
Bank  hermetically  against  living  information  ;  you 
must  make  a  fair  body  of  directors  upon  the 


240  THE    GOVERNMENT  OF   THE  BANK. 

whole,  and  trust  that  the  bias  of  some  individual 
interests  will  disappear  and  be  lost  in  the  whole. 
And  if  this  is  to  be  the  guiding  principle,  it  is  not 
consistent  to  exclude  English  bankers  from  the 
court. 

Objection  is  often  also  taken  to  the  constitution 
of  the  Committee  of  Treasury.  That  body  is  com- 
posed of  the  Governor  and  Deputy-Governor 
and  all  the  directors  who  have  held  those  offices  ; 
but  as  those  offices  in  the  main  pass  in  rotation, 
this  mode  of  election  very  much  comes  to  an  elec- 
tion by  seniority,  and  there  are  obvious  objections 
to  giving,  not  only  a  preponderance  to  age,  but  a 
monopoly  to  age.  In  some  cases,  indeed,  this 
monopoly  I  believe  has  already  been  infringed. 
When  directors  have  on  account  of  the  magnitude 
of  their  transactions,  and  the  consequent  engrossing 
nature  of  their  business,  declined  to  fill  the  chair, 
in  some  cases  they  have  been  asked  to  be  members 
of  the  Committee  of  Treasury  notwithstanding. 
And  it  would  certainly  upon  principle  seem  wiser 
to  choose  a  committee  which  for  some  purposes 
approximates  to  a  committee  of  management  by 
competence  rather  than  by  seniority. 

An  objection  is  also  taken  to  the  large  num- 
ber of  Bank  directors.  There  are  twenty-four 
directors,  a  Governor  and  a  Deputy-Governor, 


THE    GOVERNMENT  OF   THE  BANK.  241 

making  a  total  court  of  twenty-six  persons,  which 
is  obviously  too  large  for  the  real  discussion  of 
any  difficult  business.  And  the  case  is  worse 
because  the  court  only  meets  once  a  week,  and  only 
sits  a  very  short  time.  It  has  been  said,  with  ex- 
aggeration, but  not  without  a  basis  of  truth,  that  if 
the  Bank  directors  were  to  sit  for  four  hours,  there 
would  be  '  a  panic  solely  from  that.'  *  The  court/ 
says  Mr.  Tooke,  *  meets  at  half-past  eleven  or 
twelve  ;  and,  if  the  sitting  be  prolonged  beyond 
half-past  one,  the  Stock  Exchange  and  the  money 
market  become  excited,  under  the  idea  that  a 
change  of  importance  is  under  discussion  ;  and 
persons  congregate  about  the  doors  of  the  Bank 
parlour  to  obtain  the  earliest  intimation  of  the  de- 
cision.' And  he  proceeds  to  conjecture  that  the 
knowledge  of  the  impatience  without,  must  cause 
haste,  if  not  impatience,  within.  That  the  decisions 
of  such  a  court  should  be  of  incalculable  importance 
is  plainly  very  strange. 

There  should  be  no  delicacy  as  to  altering 
the  constitution  of  the  Bank  of  England.  The 
existing  constitution  was  framed  in  times  that 
have  passed  away,  and  was  intended  to  be  used 
for  purposes  very  different  from  the  present.  The 
founders  may  have  considered  that  it  would  lend 
money  to  the  Government,  thai  it  would  keep  the 
11 


242  THE    GOVERNMENT  OF   THE  BANK. 

money  of  the  Government,  that  it  would  issue 
notes  payable  to  bearer,  but  that  it  would  keep 
the  '  Banking  reserve '  of  a  great  nation  no  one 
in  the  seventeenth  century  imagined.  And  when 
the  use  to  which  we  are  putting  an  old  thing  is  a 
new  use,  in  common  sense  we  should  think  whether 
the  old  thing  is  quite  fit  for  the  use  to  which  we 
are  setting  it.  '  Putting  new  wine  into  old  bottles  * 
is  safe  only  when  you  watch  the  condition  of  the 
bottle,  and  adapt  its  structure  most  carefully. 


CHAPTER    IX. 

THE  JOINT    STOCK    BANKS. 

THE  Joint  Stock  Banks  of  this  country  are  ? 
most  remarkable  success.  Generally  speaking 
the  career  of  Joint  Stock  Companies  in  this 
country  has  been  chequered.  Adam  Smith, 
many  years  since,  threw  out  many  pregnant  hints 
on  the  difficulty  of  such  undertakings — hints 
which  even  after  so  many  years  will  well  repay 
perusal.  But  joint  stock  banking  has  been 
an  exception  to  this  rule.  Four  years  ago  I 
threw  together  the  facts  on  the  subject  and  the 
reasons  for  them  ;  and  I  venture  to  quote  the 
article,  because  subsequent  experience  suggests, 
I  think,  little  to  be  added  to  it. 

'  The  main  classes  of  joint  stock  companies  which 

have  answered  are  three: — ist.  Those  in  which 

the  capital  is  used  not  to  work  the  business  bat  to 

guarantee  the  business.    Thus  a  banker's  business 

—his  proper  business — does  not  begin  while  he  is 


244  THE  J°INT  STOCK  BANKS. 

using  his  own  money:  it  commences  when  he 
begins  to  use  the  capital  of  others.  An  insurance 
office  in  the  long  run  needs  no  capital  ;  the 
premiums  which  are  received  ought  to  exceed  the 
claims  which  accrue.  In  both  cases,  the  capital  is 
wanted  to  assure  the  public  and  to  induce  it  to 
trust  the  concern.  2ndly.  Those  companies  have 
answered  which  have  an  exclusive  privilege  which 
they  have  used  with  judgment,  or  which  possibly 
was  so  very  profitable  as  to  enable  them  to  thrive 
with  little  judgment.  3rdly.  Those  which  have 
undertaken  a  business  both  large  and  simple — 
employing  more  money  than  most  individuals  or 
private  firms  have  at  command,  and  yet  such  that, 
in  Adam  Smith's  words,  "  the  operations  are 
capable  of  being  reduced  to  a  routine  or  such  an 
uniformity  of  method  as  admits  of  no  variation." 

'  As  a  rule,  the  most  profitable  of  these  com- 
panies are  banks.  Indeed,  all  the  favouring  con- 
ditions just  mentioned  concur  in  many  banks.  An 
old-established  bank  has  a  "prestige"  which 
amounts  to  a  "privileged  opportunity" ;  though  no 
exclusive  right  is  given  to  it  by  law,  a  peculiar 
power  is  given  to  it  by  opinion.  The  business  of 
banking  ought  to  be  simple  ;  if  it  is  hard  it  is 
wrong.  The  only  securities  which  a  banker, 
using  money  that  he  may  be  asked  at  short  notice 


THE  JOINT  STOCK  BANKS.  245 

to  repay,  ought  to  touch,  are  those  which  are 
easily  saleable  and  easily  intelligible.  If  there  is 
a  difficulty  or  a  doubt,  the  security  should  be 
declined.  No  business  can  of  course  be  quite 
reduced  to  fixed  rules.  There  must  be  occasional 
cases  which  no  pre-conceived  theory  can  define. 
But  banking  comes  as  near  to  fixed  rules  certainly 
as  any  existing  business,  perhaps  as  any  possible 
business.  The  business  of  an  old-established  bank 
has  the  full  advantage  of  being  a  simple  business, 
and  in  part  the  advantage  of  being  a  monopoly 
business.  Competition  with  it  is  only  open  in  the 
sense  in  which  competition  with  "  the  London 
Tavern  "  is  open  ;  anyone  that  has  to  do  with 
either  will  pay  dear  for  it. 

'  But  the  main  source  of  the  profitableness  of 
established  banking  is  the  smallness  of  the  requisite 
capital.  Being  only  wanted  as  a  <(  moral  influence," 
it  need  not  be  more  than  is  necessary  to  secure 
that  influence.  Although,  therefore,  a  banker 
deals  only  with  the  most  sure  securities,  and  with 
those  which  yield  the  least  interest,  he  can  never- 
theless gain  and  divide  a  very  large  profit  upon 
his  own  capital,  because  the  money  in  his  hands 
is  so  much  larger  than  that  capital. 

'  Experience,  as  shown  by  plain  figures,  confirms 
these  conclusions.  We  print  at  the  end  of  this 


246 


THE  JOINT  STOCK  BANKS'. 


article  the  respective  profits  of  1 10  banks  in  Eng- 
land, and  Scotland,  and  Ireland,  being  all  in  those 
countries  of  which  we  have  sjfficient  information 
• — the  Bank  of  England  excepted.  There  art  no 
doubt  others,  but  they  are  not  quoted  even  on 
local  Stock  Exchange  lists,  and  in  most  cases 
publish  no  reports.  The  result  of  these  banks, 
as  regards  the  dividends  they  pay,  is — 


1 

6 

Capital 

Above  20  per  cent.         .... 
Between  15  and  20  per  cent. 
,,         10  and  15  per  cent. 
,,          5  and  10  per  cent. 
Under  5  per  cent  

15 
20 

% 
36 

3 

£ 

5,302,767 
5,439,439 
14,056,950 
14,182.379 
1,350,000 

no 

40,331,535 

—that  is  to  say,  above  25  per  cent,  of  the  capital 
employed  in  these  banks  pays  over  15  per  cent., 
and  62^  per  cent,  of  the  capital  pays  more  than 
10  per  cent.  So  striking  a  result  is  not  to  be 
shown  in  any  other  joint  stock  trade. 

'  The  period  to  which  these  accounts  refer  was 
certainly  not  a  particularly  profitable  one — on  the 
contrary,  it  has  been  specially  unprofitable.  The 
rate  of  interest  has  been  very  low,  and  the  amount 
of  good  security  in  the  market  small  Many 


THE  JOINT  STOCK  BANKS.  247 

banks — to  some  extent  most  banks — probably  bad 
in  their  books  painful  reminiscences  of  1866.  The 
fever  of  excitement  which  passed  over  the  nation 
was  strongest  in  the  classes  to  whom  banks  lent 
most,  and  consequently  the  losses  of  even  the 
most  careful  banks  (save  of  those  in  rural  and 
sheltered  situations)  were  probably  greater  than 
usual.  But  even  tried  by  this  very  unfavourable 
test  banking  is  a  trade  profitable  far  beyond  the 
average  of  trades. 

'  There  is  no  attempt  in  these  banks  on  the  whole 
and  as  a  rule  to  divide  too  much — on  the  contrary, 
they  have  accumulated  about  I3,ooo,ooo/.,  or 
nearly  ^rd  of  their  capital,  principally  out  of  un- 
divided profits.  The  directors  of  some  of  them 
have  been  anxious  to  put  away  as  much  as  possi- 
ble and  to  divide  as  little  as  possible. 

'  The  reason  is  plain  ;  out  of  the  banks  which 
pay  more  than  20  per  cent,  all  but  one  were  old- 
established  banks,  and  all  those  paying  between  15 
and  20  per  cent,  were  old  banks  too.  The  "  privi- 
ieged  opportunity  "  of  which  we  spoke  is  singu- 
laily  conspicuous  in  such  figures;  it  enables  banks 
to  pay  much,  which  without  it  would  not  have  paid 
much.  The  amount  of  the  profit  is  clearly  pro- 
portional to  the  value  of  the  "  privileged  oppor- 
tunitv."  All  the  banks  which  pay  above  20  per 


248  THE  JOINT  STOCK  BANKS. 

cent.,  save  one,  are  banks  more  than  25  years  old; 
all  those  which  pay  between  1 5  and  20  are  so  too. 
A  new  bank  could  not  make  these  profits,  or  even 
by  its  competition  much  reduce  these  profits  ;  in 
attempting  to  do  so,  it  would  simply  ruin  itself 
Not  possessing  the  accumulated  credit  of  years,  it 
would  have  to  wind  up  before  it  attained  that  credit. 
'The  value  of  the  opportunity  too  is  propor- 
tioned to  what  has  to  be  paid  for  it.  Some  old 
banks  have  to  pay  interest  for  all  their  money; 
some  have  much  for  which  they  pay  nothing. 
Those  who  give  much  to  their  customers  have  ol 
course  less  left  for  their  shareholders.  Thus 
Scotland,  where  there  is  always  a  daily  interest, 
has  no  bank  in  the  lists  paying  over  15  per  cent, 
The  profits  of  Scotch  banks  run  thus  :— 


Capital                   Divide 

£ 

Bank  of  Scotland  . 

.    1,500,000 

12 

British  Linen  Company  . 

.       1,000,000 

'3 

Caledonian     .... 

125,000    . 

10 

Clydesdale     .... 

900,000 

10 

Commercial  Bank  of  Scotland 

.     1,000,000 

13 

National  Bank  of  Scotland 

.       1  ,000,000 

12 

North  of  Scotland 

280,000 

IO 

Union  Bank  of  Scotland 

.       1,000,000 

IO 

City  of  Glasgow 

870/000 

8 

Royal  Bank 

2,000,000 

8 

9,675,000 


THE  JOINT  STOCK  BANKS.  249 

Good  profits  enough,  but  not  at  all  like  the  profits 
of  the  London  and  Westminster,  or  the  othei 
most  lucrative  banks  of  the  South. 

4  The  Bank  of  England,  it  is  true,  does  not  seem 
to  pay  so  much  as  other  English  banks  in  this 
way  of  reckoning.  It  makes  an  immense  profit, 
but  then  its  capital  is  immense  too.  In  fact,  the 
Bank  of  England  suffers  under  two  difficulties. 

o 

Being  much  older  than  the  other  joint  stock  banks, 
it  belongs  to  a  less  profitable  era.  When  it  was 
founded,  banks  looked  rather  to  the  profit  on  their 
own  capital,  and  to  the  gains  of  note  issue  than 
to  the  use  of  deposits.  The  first  relations  with 
the  State  were  more  like  those  of  a  finance 
company  than  of  a  bank,  as  we  now  think  of 
banking.  If  the  Bank  had  not  made  loans  to  the 
Government,  which  we  should  now  think  dubious, 
the  Bank  would  not  have  existed,  for  the  Govern- 
ment would  never  have  permitted  it.  Not  only  is 
the  capital  of  the  Bank  of  England  relatively 
greater,  but  the  means  of  making  profit  in  the 
Bank  of  England  are  relatively  less  also.  By 
custom  and  understanding  the  Bank  of  England 
keep  a  much  greater  reserve  in  unprofitable  cash 
than  other  banks ;  if  they  do  not  keep  it,  either 
our  whole  system  must  be  changed  or  we  should 

break   up    in    utter   bankruptcy.      The     earning 
11* 


250  THE  JOINT   STOCK  BANKS. 

faculty  of  the  Bank  of  England  is  in  proportion 
less  than  that  of  other  banks,  and  also  the  sum  on 
which  it  has  to  pay  dividend  is  altogether  greater 
than  theirs. 

'  It  is  interesting  to  compare  the  facts  of  joint 
stock  banking  with  the  fears  of  it  which  were  felt. 
In  1832,  Lord  Overstone  observed: — "I  think 
that  joint  stock  banks  are  deficient  in  everything 
requisite  for  the  conduct  of  the  banking  business 
except  extended  responsibility  ;  the  banking  busi- 
ness requires  peculiarly  persons  attentive  to  all 
its  details,  constantly,  daily,  and  hourly  watch- 
ful of  every  transaction,  much  more  than  mer- 
cantile or  trading  business.  It  also  requires 
immediate  prompt  decisions  upon  circumstances 
when  they  arise,  in  many  cases  a  decision  that 
does  not  admit  of  delay  for  consultation  ;  it  also 
requires  a  discretion  to  be  exercised  with  refer- 
ence to  the  special  circumstances  of  each  case. 
Joint  stock  banks  being  of  course  obliged  to 
act  through  agents  and  not  by  a  principal,  and 
therefore  under  the  restraint  of  general  rules, 
cannot  be  guided  by  so  nice  a  reference  to  degrees 
of  difference  in  the  character  of  responsibility  of 
parties ;  nor  can  they  undertake  to  regulate  the 
assistance  to  be  granted  to  concerns  under  tem- 
porary embarrassment  by  so  accurate  a  reference 


THE  JOINT  STOCK  BANKS.  251 

to  the  circumstances,  favourable  or  unfavourable, 
of  each  case." 

'  But  in  this  very  respect,  joint  stock  banks  have 
probably  improved  the  business  of  banking.  The 
old  private  banks  in  former  times  used  to  lend 
much  to  private  individuals ;  the  banker,  as  Lord 
Overstone  on  another  occasion  explained,  could 
have  no  security,  but  he  formed  his  judgment  of 
the  discretion,  the  sense,  and  the  solvency  of  those 
to  whom  he  lent.  And  when  London  was  by 
comparison  a  small  city,  and  when  by  comparison 
everyone  stuck  to  his  proper  business,  this 
practice  might  have  been  safe.  But  now  that 
London  is  enormous  and  that  no  one  can  watch 
anyone,  such  a  trade  would  be  disastrous;  at 
present,  it  would  hardly  be  safe  in  a  country  town. 
The  joint  stock  banks  were  quite  unfit  for  the 
business  Lord  Overstone  meant,  but  then  that 
business  is  quite  unfit  for  the  present  time/ 

This  success  of  Joint  Stock  Banking  is  very  con- 
trary to  the  general  expectation  at  its  origin. 
Not  only  private  bankers,  such  as  Lord  Overstone 
then  was,  but  a  great  number  of  thinking  persons 
feared  that  the  joint  stock  banks  would  fast 
ruin  themselves,  and  then  cause  a  collapse  and 
panic  in  the  country.  The  whole  of  English 


THE  JOINT  STOCK  BANKS. 

commercial  literature  between  1830  and  1840  is 
filled  with  that  idea.  Nor  did  it  cease  in  1840, 
So  late  as  1845,  Sir  R.  Peel  thought  the  founda 
tion  of  joint  stock  banks  so  dangerous  that  he 
subjected  it  to  grave  and  exceptional  difficulty. 
Under  the  Act  of  1845,  which  he  proposed,  no 
such  companies  could  be  founded  except  with 
shares  of  ioo/.  with  5O/.  paid  up  on  each ;  which 
effectually  checked  the  progress  of  such  banks, 
for  few  new  ones  were  established  for  many  years, 
or  till  that  act  had  been  repealed.  But  in  this, 
as  in  many  other  cases,  perhaps  Sir  R.  Peel  will 
be  found  to  have  been  clear-sighted  rather  than 
far-sighted.  He  was  afraid  of  certain  joint 
stock  banks  which  he  saw  rising  around  him  ;  but 
the  effect  of  his  legislation  was  to  give  to  these  very 
banks,  if  not  a  monopoly,  at  any  rate  an  exemption 
from  new  rivals.  No  one  now  founds  or  can  found 
a  new  private  bank,  and  Sir  R.  Peel  by  law  pre- 
vented new  joint  stock  banks  from  being  estab- 
lished. Though  he  was  exceedingly  distrustful  of 
the  joint  stock  banks  founded  between  1826  and 
1845,  yet  in  fact  he  was  their  especial  patron, 
and  he  more  than  any  other  man  encouraged  and 
protected  them. 

But  in  this  wonderful  success  there   are  two 
dubious  points,   two   considerations    of  different 


THE  JOINT  STOCK:  BANKS.  253 

kinds,  which  forbid  us  to  say  that  in  other  countries, 
e.ven  in  countries  with  the  capacity  of  co-operation, 
joint  stock  banks  would  succeed  as  well  as  we 
have  seen  that  they  succeed  in  England,  ist. 
These  great  Banks  have  not  had  to  keep  so  large  a 
reserve  against  their  liabilities  as  it  was  natural 
that  they  should,  being  of  first-rate  magnitude, 
keep.  They  were  at  first,  of  course,  very  small 
in  comparison  with  what  they  are  now.  They  found 
a  number  of  private  bankers  grouped  round  the 
Bank  of  England,  and  they  added  themselves  to 
the  group.  Not  only  did  they  keep  their  reserve 
from  the  beginning  at  the  Bank  of  England,  but 
they  did  not  keep  so  much  reserve  as  they  would 
have  kept  if  there  had  been  no  Bank  of  England. 
For  a  long  time  this  was  hardly  noticed.  For 
many  years  questions  of  the  '  currency/  particularly 
questions  as  to  the  Act  of  1844,  engrossed  the 
attention  of  all  who  were  occupied  with  these  sub- 
jects Even  those  who  were  most  anxious  to 
speak  evil  of  joint  stock  banks,  did  not  mention 
this  particular  evil.  The  first  time,  as  far  as  I 
know,  that  it  was  commented  on  in  any  important 
document,  was  in  an  official  letter  written  in  1857 
by  Mr.  Weguelin,  who  was  then  Governor  of  the 
Bank,  to  Sir  George  Lewis,  who  was  then 
Chancellor  of  the  Exchequer.  The  Governor 


254  TH-   JOINT  STOCK  BANKS. 

and  the  Directors  of  the  Bank  of  England  had 
been  asked  by  Sir  George  Lewis  severally  to  give 
their  opinions  on  the  Act  of  1844,  and  all  their 
replies  were  published.  In  his,  Mr.  Weguelin 
says :— 

'  If  the  amount  of  the  reserve  kept  by  the  Bank 
of  England  be  contrasted  with  the  reserve  kept  by 
the  joint  stock  banks,  a  new  and  hitherto  little 
considered  source  of  danger  to  the  credit  of  the 
country  will  present  itself.  The  joint  stock  banks 
of  London,  judging  by  their  published  accounts, 
have  deposits  to  the  amount  of  3O,ooo,ooo/.  Their 
capital  is  not  more  than3,ooo,ooo/.,  and  they  have 
on  an  average  3i,ooo,ooo/.,  invested  in  one  way  or 
another,  leaving  only  2,ooo,ooo/.  as  a  reserve 
against  all  this  mass  of  liabilities.' 

But  these  remarkable  words  were  little  observed 
in  the  discussions  of  that  time.  The  air  was  ob- 
scured by  other  matters.  But  in  this  work  I  have 
said  so  much  on  the  subject  that  I  need  say  little 
now.  The  joint  stock  banks  now  keep  a  main 
part  of  their  reserve  on  deposit  with  the  bill- 
brokers,  or  in  good  and  convertible  interest- 
bean  rig  securities.  From  these  they  obtain  a 
large  income,  and  that  income  swells  their  profits. 
If  they  had  to  keep  a  much  larger  part  than  now 
of  that  reserve  in  barren  cash,  their  dividends 


THE    7O I  N'T  STOCK  HANKS.  255 

would  be  reduced,  and  their  present  success  would 
become  less  conspicuous. 

The  second  misgiving,  which  many  calm 
observers  more  and  more  feelvas  to  our  largest 
joint  stock  banks,  fastens  itself  on  their  govern- 
ment. Is  that  government  sufficient  to  lend  well 
and  keep  safe  so  many  millions  ?  They  are 
governed,  as  every  one  knows,  by  a  board  oi 
directors,  assisted  by  a  general  manager,  and 
there  are  in  London  unrivalled  materials  for  com- 
posing good  boards  of  directors.  There  are  very 
many  men  of  good  means,  of  great  sagacity 
and  great  experience  in  business,  who  are  obliged 
to  be  in  the  City  every  day,  and  to  remain  there 
during  the  day,  but  who  have  very  much  time  on 
their  hands.  A  merchant  employing  solely  or  prin- 
cipally his  own  capital  has  often  a  great  deal  of 
leisure.  He  is  obliged  to  be  on  the  market,  and 
to  hear  what  is  doing.  Every  day  he  has  some 
business  to  transact,  but  his  transactions  can  be  but 
few.  His  capital  can  bear  only  a  limited  number  of 
purchases  ;  if  he  bought  as  much  as  would  fill  his 
time  from  day  to  day  he  would  soon  be  ruined,  for 
he  could  not  pay  for  it.  Accordingly,  many  excellent 
men  of  business  are  quite  ready  to  become  mem- 
bers of  boards  of  directors,  and  to  attend  to  the 
business  of  companies,  a  good  deal  for  the  employ- 


256  THE  JOINT  STOCK  BAKXS. 

ment's  sake.  To  have  an  interesting  occupation 
which  brings  dignity  and  power  with  it  pleases 
them  very  much.  As  the  aggregation  of  commerce 
in  great  cities  grows,  the  number  of  such  men 
augments.  A  coitncil  of  grave,  careful,  and  ex- 
perienced men  can,  without  difficulty,  be  collected 
for  a  great  bank  in  London,  such  as  never  could 
have  been  collected  before,  and  such  as  cannot 
now  be  collected  elsewhere. 

There  are  facilities,  too,  for  engaging  a  good 
banker  to  be  a  manager  such  as  there  never  were 
before  in  the  world.  The  number  of  such  persons 
is  much  on  the  increase.  Any  careful  person  who 
is  experienced  in  figures,  and  has  real  sound  sense, 
may  easily  make  himself  a  good  banker.  The 
modes  in  which  money  can  be  safely  lent  by  a 
banker  are  not  many,  and  a  clear-headed,  quiet, 
industrious  person  may  soon  learn  all  that  is 
necessary  about  them.  Our  intricate  law  of  real 
property  is  an  impediment  in  country  banking,  for 
it  requires  some  special  study  even  to  comprehend 
the  elements  of  a  law  which  is  full  of  technical 
words,  and  which  can  only  be  explained  by  narra- 
ting its  history.  But  the  banking  of  great  cities  is 
little  concerned  with  loans  on  landed  property. 
And  all  the  rest  of  the  knowledge  requisite  for  a 
banker  can  easily  be  obtained  by  anyone  who  has 


THE  JOINT  STOCK  BANKS.  2$? 

the  sort  of  mind  which  takes  to  it.  No  doubt  there 
is  a  vast  routine  of  work  to  be  learned,  and  the 
manager  of  a  large  bank  must  have  a  great 
facility  in  transacting  business  rapidly.  But  a 
great  number  of  persons  are  now  bred  from 
their  earliest  manhood  in  the  very  midst  of 
that  routine  ;  they  learn  it  as  they  would  learn 
a  language,  and  come  to  be  no  more  able  to 
unlearn  it  than  they  could  unlearn  a  language. 
And  the  able  ones  among  them  acquire  an  almost 
magical  rapidity  in  effecting  the  business  connected 
with  that  routine.  A  very  good  manager  and 
very  good  board  of  directors  can,  without  unrea- 
sonable difficulty,  be  provided  for  a  bank  at 
present  in  London. 

It  will  be  asked,  what  more  can  be  required  ? 
I  reply,  a  great  deal.  All  which  the  best  board 
of  directors  can  really  accomplish,  is  to  form  a 
good  decision  on  the  points  which  the  manager 
presents  to  them,  and  perhaps  on  a  few  others 
which  one  or  two  zealous  members  of  their  body 
may  select  for  discussion.  A  meeting  of  fifteen 
or  eighteen  persons  is  wholly  unequal  to  the 
transaction  of  more  business  than  this  ;  it  will  be 
fortunate,  and  it  must  be  well  guided,  if  it  should 
be  found  to  be  equal  to  so  much.  The  discussion 
even  of  simple  practical  points  by  such  a  number  of 


258  THE  JOINT  STOCK  BANKS. 

persons  is  a  somewhat  tedious  affair.  Many  ot  them 
will  wish  to  speak  on  every  decision  of  moment, 
and  some  of  them — some  of  the  best  of  them  per- 
haps--will  only  speak  with  difficulty  and  slowly. 
Very  generally,  several  points  will  be  started  at 
once,  unless  the  discussion  is  strictly  watched  by  a 
rigid  chairrian  ;  and  even  on  a  single  point  the 
arguments  will  often  raise  grave  questions  which 
cannot  be  answered,  and  suggest  many  more 
issues  than  can  be  advantageously  decided  by  the 
meeting.  The  time  required  by  many  persons 
for  discussing  many  questions,  would  alone 
prevent  an  assembly  of  many  persons  from  over- 
looking a  large  and  complicated  business. 

Nor  is  this  the  only  difficulty.  Not  only  would 
a  real  supervision  of  a  large  business  by  a  board 
of  directors  require  much  more  time  than  the 
board  would  consent  to  occupy  in  meeting,  it 
would  also  require  much  more  time  and  much 
more  thought  than  the  individual  directors  would 
consent  to  give.  These  directors  are  only  em- 
ploying on  the  business  of  the  Bank  the  vacant 
moments  of  their  time,  and  the  spare  energies 
of  their  minds.  They  cannot  give  the  Bank 
more  ;  the  rest  is  required  for  the  safe  conduct  of 
their  own  affairs,  and  if  they  diverted  it  from 
these  affairs  they  would  be  ruined.  A  few  of 


THE  JOINT  STOCK:  BANKS.  259 

them  may  have  little  other  business,  or  they  may 
have  other  partners  in  the  business,  on  whose 
industry  they  can  rely,  and  whose  judgment 
they  can  trust ;  one  or  two  may  have  retired  from 
business.  But  for  the  most  part,  directors  of  a 
company  cannot  attend  principally  and  anxiously 
to  the  affairs  of  a  company  without  so  far  neglect- 
ing their  own  business  as  to  run  great  risk  of  ruin  ; 
and  if  they  are  ruined,  their  trustworthiness 
ceases,  and  they  are  no  longer  permitted  by 
custom  to  be  directors. 

Nor,  even  if  it  were  possible  really  to  super- 
vise a  business  by  the  effectual  and  constant 
inspection  of  fifteen  or  sixteen  rich  and  capable 
persons,  would  even  the  largest  business  easily 
bear  the  expense  of  such  a  supervision.  I  say  rich, 
because  the  members  of  a  board  governing  a 
large  bank  must  be  men  of  standing  and  note 
besides,  or  they  would  discredit  the  bank  ;  they 
need  not  be  rich  in  the  sense  of  being  worth 
millions,  but  they  must  be  known  to  possess  a 
fair  amount  of  capital  and  be  seen  to  be  transact- 
ing a  fair  quantity  of  business.  But  the  labour  of 
such  persons,  I  do  not  say  their  spare  powers, 
but  their  principal  energies,  fetches  a  high  price. 
Business  is  really  a  profession  often  requiring  for 
its  practice  quite  as  muc  \  knowledge,  and  quite  as 


260  THE  JOINT  STOCK  BANK'S. 

much  skill,  as  law  and  medicine  ;  and  requiring 
also  the  possession  of  money.  A  thorough  man 
of  business,  employing  a  fair  capital  in  a  trade, 
which  he  thoroughly  comprehends,  not  only  earns 
a  profit  on  that  capital,  but  really  makes  of  his 
professional  skill  a  large  income.  He  has  a  re- 
venue from  talent  as  well  as  from  money  ;  and  to 
induce  sixteen  or  eighteen  persons  to  abandon 
such  a  position  and  such  an  income  in  order  to 
devote  their  entire  attention  to  the  affairs  of  a 
joint  stock  company,  a  salary  must  be  given 
too  large  for  the  bank  to  pay  or  for  anyone  to 
wish  to  propose. 

And  an  effectual  supervision  by  the  whole  board 
being  impossible,  there  is  a  great  risk  that  the 
whole  business  may  fall  to  the  general  manager. 
Many  unhappy  cases  have  proved  this  to  be  very 
dangerous.  Even  when  the  business  of  joint  stock 
banks  was  far  less,  and  when  the  deposits  entrusted 
to  them  were  very  much  smaller,  a  manager  some- 
times committed  frauds  which  were  dangerous,  and 
still  oftener  made  mistakes  that  were  ruinous. 
Actual  crime  will  always  be  rare  ;  but,  as  an  unin- 
spected manager  of  a  great  bank  has  the  control 
of  untold  millions,  sometimes  we  must  expect  to 
see  it :  the  magnitude  of  the  temptation  will 
occasionally  prevail  over  the  feebleness  of  human 


THE  JOINT  STOCK  BANKS.  26 1 

nature.  But  error  is  far  more  formidable  than 
fraud  :  the  mistakes  of  a  sanguine  manager  are 
far  m^re  to  be  dreaded  than  the  theft  of  a 
dishonest  manager.  Easy  misconception  is  far 
more  common  than  long-sighted  deceit.  And 
the  losses  to  which  an  adventurous  and  plausible 
manager,  in  complete  good  faith,  would  readily 
commit  a  bank,  are  beyond  comparison  greater 
than  any  which  a  fraudulent  manager  would  be 
able  to  conceal,  even  with  the  utmost  ingenuity. 
If  the  losses  by  mistake  in  banking  and  the  losses 
by  fraud  were  put  side  by  side,  those  by  mistake 
would  be  incomparably  the  greater.  There  is  no 
more  unsafe  government  for  a  bank  than  that  of 
an  eager  and  active  manager,  subject  only  to  the 
supervision  of  a  numerous  board  of  directors, 
even  though  that  board  be  excellent,  for  the 
manager  may  easily  glide  into  dangerous  and 
insecure  transactions,  nor  can  the  board  effec- 
tually check  him. 

The  remedy  is  this  :  a  certain  number  of  the 
directors,  either  those  who  have  more  spare  time 
than  others,  or  those  who  are  more  ready  to  sell  a 
large  part  of  their  time  to  the  bank,  must  be 
formed  into  a  real  working  committee,  which  must 
meet  constantly,  must  investigate  every  large 
transaction,  must  be  acquainted  with  the  means 


262  THE  JOINT  STOCK  BANKS. 

and  standing  of  every  large  borrower,  and  must 
be  in  such  incessant  communication  with  the 
manager  that  it  will  be  impossible  for  him  to  en- 
gage in  hazardous  enterprises  of  dangerous  mag- 
nitude without  their  knowing  it  arid  having  an 
opportunity  of  forbidding  it.  In  almost  all  cases 
they  would  forbid  it ;  all  committees  are  cautious, 
and  a  committee  of  careful  men  of  business; 
picked  from  a  large  city,  will  usually  err  on  the  side 
of  caution  if  it  err  at  all.  The  daily  attention 
of  a  small  but  competent  minor  council,  to  whom 
most  of  the  powers  of  the  directors  are  delegated, 
and  who,  like  a  cabinet,  guide  the  deliberations  of 
the  board  at  its  meetings,  is  the  only  adequate 
security  of  a  large  bank  from  the  rash  engage- 
ments of  a  despotic  and  active  general  manager. 
Fraud,  in  the  face  of  such  a  committee,  would 
probably  never  be  attempted,  and  even  now  it  is 
a  rare  and  minor  evil. 

Some  such  committees  are  vaguely  known  to 
exist  in  most,  if  not  all,  our  large  joint  stock  banks. 
But  their  real  constitution  is  not  known.  No 
customer  and  no  shareholder  knows  the  names 
of  the  managing  committee,  perhaps,  in  any  of 
these  large  banks.  And  this  is  a  grave  error. 
A  large  depositor  ought  to  be  able  to  ascertain 
who  really  are  the  persons  that  dispose  of  his 


THE  JOINT  STOCK  BANKS.  263 

money ;  and  still  more  a  large,  shareholder  ought 
not  to  rest  till  he  knows  who  it  is  that  makes 
engagements  on  his  behalf,  and  who  it  is  that 
may  ruin  him  if  they  choose.  The  committee 
ought  to  be  composed  of  quiet  men  of  business, 
who  can  be  ascertained  by  inquiry  to  be  of 
high  character  and  well-judging  mind.  And  if 
the  public  and  the  shareholder  knew  that  there 
was  such  a  committee,  they  would  have  sufficent 
reasons  for  the  confidence  which  now  is  given 
without  such  reasons. 

A  certain  number  of  directors  attending  daily 
by  rotation  is,  it  should  be  said,  no  substitute  for 
a  permanent  committee.  It  has  no  sufficient 
responsibility.  A  changing  body  cannot  have 
any  responsibility.  The  transactions  which  were 
agreed  to  by  one  set  of  directors  present  on  the 
Monday  might  be  exactly  those  which  would  be 
much  disapproved  by  directors  present  on  the 
Wednesday.  It  is  essential  to  the  decisions  of 
most  business,  and  not  least  of  the  banking- 
business,  that  they  should  be  made  constantly  by 
the  same  persons  ;  the  chain  of  transactions  mast 
pass  through  the  same  minds.  A  large  business 
may  be  managed  tolerably  by  a  quiet  group  of 
second-rate  men  if  those  men  be  always  the  same ; 
but  it  cannot  be  managed  at  all  by  a  fluctuating 


264  THE  JOINT  STOCK  BANKS. 

body,  even  of  the  very  cleverest  men.  You  might 
as  well  attempt  to  guide  the  affairs  of  the  nation 
by  means  of  a  cabinet  similarly  changing. 

Our  great  joint  stock  banks  are  imprudent  in 
so  carefully  concealing  the  details  of  their  govern- 
ment, and  in  secluding  those  details  from  the  risk 
of  discussion.  The  answer,  no  doubt  will  be,  '  Let 
well  alone  ;  as  you  have  admitted,  there  hardly 
ever  before  was  so  great  a  success  as  these  banks 
of  ours  :  what  more  do  you  or  can  you  want  ?  '  I 
can  only  say  that  I  want  further  to  confirm  this 
great  success  and  to  make  it  secure  for  the  future. 
At  present  there  is  at  least  the  possibility  of  a 
great  reaction.  Supposing  that,  owing  to  defects 
in  its  government,  one  even  of  the  greater 
London  joint  stock  banks  failed,  there  would  be 
an  instant  suspicion  of  the  whole  system.  One 
terra  incognita  being  seen  to  be  faulty,  every  other 
terra  incognita  would  be  suspected.  If  the  real 
government  of  these  banks  had  for  years  been 
known,  and  if  the  subsisting  banks  had  been  known 
not  to  be  ruled  by  the  bad  mode  of  government 
which  had  ruined  the  bank  that  had  fallen  then  the 
ruin  of  that  bank  would  not  be  hurtful.  The  other 
banks  would  be  seen  to  be  exempt  from  the 
cause  which  had  destroyed  it.  But  at  present  the 


THE  JOINT  STOCK  BANKS.  26$ 

ruin  of  one  of  these  great  banks  would  greatly 
impair  the  credit  of  all.  Scarcely  any  one  knows 
the  precise  government  of  any  one  ;  in  no  case 
has  that  government  been  described  on  authority ; 
and  the  fall  of  one  by  grave  misgovernment  would 
be  taken  to  show  that  the  others  might  as  easily 
be  misgoverned  also.  And  a  tardy  disclosuure 
even  of  an  admirable  constitution  would  not  much 
help  the  surviving  banks  :  as  it  was  extracted  by 
necessity,  it  would  be  received  with  suspicion.  A 
sceptical  world  would  say '  of  course  they  say  they 
are  all  perfect  now  ;  it  would  not  do  for  them  to 
say  anything  else.' 

And  not  only  the  depositors  and  the  share- 
holders of  these  large  banks  have  a  grave  in- 
terest in  their  good  government,  but  the  public 
also.  We  have  seen  that  our  banking  reserve  is, 
as  compared  with  our  liabilities,  singularly  small ; 
we  have  seen  that  the  rise  of  these  great  banks 
has  lessened  the  proportion  of  that  reserve  to  those 
liabilities ;  we  have  seen  that  the  greatest  strain 
on  the  banking  reserve  is  a  '  panic/  Now,  no 
cause  is  more  capable  of  producing  a  panic,  perhaps 
none  is  so  capable,  as  the  failure  of  a  first-rate 
joint  stock  bank  in  London.  Such  an  event 
would  have  something  like  the  effect  of  the 

12 


266  THE  JOINT  STOCK  BANKS. 

failure  of  Overend,  Gurney  and  Co.  ;  scarcely  any 
other  event  would  have  an  equal  effect.  And 
therefore,  under  the  existing  constitution  of  our 
banking  system  the  government  of  these  great 
banks  is  of  primary  importance  to  us  all. 


CHAPTER    X. 

THE    PRIVATE    BANKS. 

PERHAPS  some  readers  of  the  last  pait  of  the  last 
chapter  have  been  inclined  to  say  that  I  must  be 
a  latent  enemy  to  Joint  Stock  Banking.  At  any 
rate,  I  have  pointed  out  what  I  think  grave  defects 
in  it.  But  I  fear  that  a  reader  of  this  chapter  may, 
on  like  grounds,  suppose  that  I  am  an  enemy  to 
Private  Banking.  And  I  can  only  hope  that  the 
two  impressions  may  counteract  one  another,  and 
may  show  that  I  do  not  intend  to  be  unfair. 

I  can  imagine  nothing  better  in  theory  or  more 
successful  in  practice  than  private  banks  as  they 
were  in  the  beginning.  A  man  of  known  wealth, 
known  integrity,  and  known  ability  is  largely  en- 
trusted with  the  money  of  his  neighbours.  The 
confidence  is  strictly  personal.  His  neighbours 
know  him,  and  trust  him  because  they  know  him. 
They  see  daily  his  manner  of  life,  and  judge  from 
it  that  their  confidence  is  deserved.  In  rural 


268  THE  PRIVATE  BANKS. 

districts,  and  in  former  times,  it  was  difficult  for  a 
man  to  ruin  himself  except  at  the  place  in  which 
he  lived  ;  for  the  most  part  he  spent  his  money 
there,  and  speculated  there  if  he  speculated  at  alL 
Those  who  lived  there  also  would  soon  see  if  he 
was  acting  in  a  manner  to  shake  their  confidence. 
Even  in  large  cities,  as  cities  then  were,  it  was 
possible  for  most  persons  to  ascertain  with  fair 
certainty  the  real  position  of  conspicuous  persons, 
and  to  learn  all  which  was  material  in  fixing  their 
credit.  Accordingly  the  bankers  who  for  a  long 
series  of  years  passed  successfully  this  strict  and 
continual  investigation,  became  very  wealthy  and 
very  powerful. 

The  name  '  London  Banker '  had  especially  a 
charmed  value.  He  was  supposed  to  represent, 
and  often  did  represent,  a  certain  union  of  pecu- 
niary sagacity  and  educated  refinement  which  was 
scarcely  to  be  found  in  any  other  part  of  society. 
In  a  time  when  the  trading  classes  were  much 
ruder  than  they  now  are,  many  private  bankers 
possessed  variety  of  knowledge  and  a  delicacy  of 
attainment  which  would  even  now  be  very  rare. 
Such  a  position  is  indeed  singularly  favourable 
The  calling  is  hereditary  ;  the  credit  of  the  bank 
descends  from  father  to  son  :  this  inherited  wealth 
soon  brings  inherited  refinement.  Banking  is  a 


THE  PRIVATE  BANKS.  269 

watchful,  but  not  a  laborious  trade.  A  banker, 
even  in  large  business,  can  feel  pretty  sure  that  all 
his  transactions  are  sound,  and  yet  have  much 
spare  mind.  A  certain  part  of  his  time,  and  a 
considerable  part  of  his  thoughts,  he  can  readily 
devote  to  other  pursuits.  And  a  London  banker 
can  also  have  the  most  intellectual  society  in  the 
world  if  he  chooses  it.  There  has  probably  very 
rarely  ever  been  so  happy  a  position  as  that  oi 
a  London  private  banker ;  and  never  perhaps  a 
happier. 

It  is  painful  to  have  to  doubt  of  the  continu- 
ance of  such  a  class,  and  yet,  I  fear,  we  must  doubt 
of  it.  The  evidence  of  figures  is  against  it.  In 
1810  there  were  40  private  banks  in  Lombard 
Street  admitted  to  the  clearing-house :  there  now 
are  only  13.  Though  the  business  of  banking  has 
increased  so  much  since  1810,  this  species  01 
banks  is  fewer  in  number  than  it  was  then.  Nor 
is  this  the  worst.  The  race  is  not  renewed. 
There  are  not  many  recognised  impossibilities  in 
business,  but  everybody  admits  '  that  you  cannot 
found  a  new  private  bank.'  No  such  has  beer 
founded  in  London,  or,  as  far  as  I  know,  in  the 
country,  for  many  years.  The  old  ones  merge  oi 
die,  and  so  the  number  is  lessened ;  but  no  new 
ones  begin  so  as  to  increase  that  number  again. 


27O  THL   PRIVATE   BANKS. 

The  truth  is  that  the  circumstances  which 
originally  favoured  the  establishment  of  private 
banks  have  now  almost  passed  away.  The 
world  has  become  so  large  and  complicated  that 
it  is  not  easy  to  ascertain  who  is  rich  and  who  is 
poor.  No  doubt  there  are  some  enormously 
wealthy  men  in  England  whose  means  everybody 
has  heard  of,  and  has  no  doubt  of.  But  these  are 
not  the  men  to  incur  the  vast  liabilities  of  private 
banking.  If  they  were  bred  in  it  they  might  stay 
in  it ;  but  they  would  never  begin  it  for  themselves. 
And  if  they  did,  I  expect  people  would  begin  to 
doubt  even  of  their  wealth.  It  would  be  said, 
1  What  does  A  B  go  into  banking  for  ?  he  cannot 
be  as  rich  as  we  thought.'  A  millionaire  com- 
monly shrinks  from  liability,  and  the  essence  oi 
great  banking  is  great  liability.  No  doubt  there 
are  many  '  second-rate '  rich  men,  as  we  now 
count  riches,  who  would  be  quite  ready  to  add  to 
their  income  the  profit  of  a  private  bank  if  only 
they  could  manage  it.  But  unluckily  they  cannot 
manage  it.  Their  wealth  is  not  sufficiently 
familiar  to  the  world ;  they  cannot  obtain  the 
necessary  confidence.  No  new  private  bank- 
is  founded  in  England  because  men  of  first-rate 
wealth  will  not  found  one,  and  men  not  of  abso- 
lutely first-rate  wealth  cannot. 


THE  PRIVATE  BANKS.  2;i 

In  the  present  day,  also,  private  banking  is  ex- 
posed to  a  competition  against  which  in  its  origin 
it  had  not  to  struggle.  Owing  to  the  changes 
of  which  I  have  before  spoken,  joint  stock 
banking  has  begun  to  compete  with  it.  In  old 
times  this  was  impossible ;  the  Bank  of  England 
had  a  monopoly  in  banking  of  the  principle  of  asso- 
ciation. But  now  large  joint  stock  banks  of  de- 
posit are  among  the  most  conspicuous  banks  in 
Lombard  Street.  They  have  a  large  paid-up 
capital  and  intelligible  published  accounts ;  they 
use  these  as  an  incessant  advertisement,  in  a 
manner  in  which  no  individual  can  use  his  own 
wealth.  By  their  increasing  progress  they  effec- 
tually prevent  the  foundation  of  any  new  private 
bank.  ^ 

The  amount  of  the  present  business  of  private 
banks  is  perfectly  unknown.  Their  balance  sheets 
are  effective  secrets — rigidly  guarded.  But  none 
of  them,  except  a  few  of  the  largest,  are  believed 
at  all  to  gain  business.  The  common  repute  of 
Lombard  Street  might  be  wrong  in  a  particular 
case,  but  upon  the  general  doctrine  it  is  almost 
sure  to  be  right.  There  are  a  few  well-known 
exceptions,  but  according  to  universal  belief  the 
deposits  of  most  private  bankers  in  London  tend 
rather  to  diminish  than  to  increase. 


272  THE  PRIVATE  BANKS. 

As  to  the  smaller  banks,  this  naturally  would  be 
so.  A  large  bank  always  tends  to  become  larger, 
and  a  small  one  tends  to  become  smaller.  People 
naturally  choose  for  their  banker  the  bankei  who 
has  most  present  credit,  and  the  one  who  has  most 
money  in  hand  is  the  one  who  possesses  such  credit, 
This  is  what  is  meant  by  saying  that  a  long  estab- 
lished and  rich  bank  has  a  '  privileged  opportunity ' ; 
it  is  in  a  better  position  to  do  its  business  than  any 
one  else  is  ;  it  has  a  great  advantage  over  old 
competitors  and  an  overwhelming  superiority  over 
new  comers.  New  people  coming  into  Lombard 
Street  judge  by  results  ;  they  give  to  those  who 
have  :  they  take  their  money  to  the  biggest  bank 
because  it  is  the  biggest.  I  confess  I  cannot, 
looking  far  forward  into  the  future,  expect  that  the 
smaller  private  banks  will  maintain  their  ground. 
Their  old  connections  will  not  leave  them  ;  there 
will  be  no  fatal  ruin,  no  sudden  mortality.  But 
the  tide  will  gently  ebb,  and  the  course  of  busi- 
ness will  be  carried  elsewhere. 

Sooner  or  later,  appearances  indicate,  and  prin- 
ciple suggests,  that  the  business  of  Lombard  Street 
will  be  divided  between  the  joint  stock  banks  and 
a  few  large  private  banks.  And  then  we  have  to 
ask  ourselves  the  question,  can  those  large  private 
banks  be  permanent  ?  I  am  sure  I  should  be  very 


THE  PRIVATE  BANKS. 


273 


sorry  to  say  that  they  certainly  cannot,  but  at  the 
same  time  I  cannot  be  blind  to  the  grave  difficulties 
which  they  must  surmount. 

In  the  first  place,  an  hereditary  business  of  great 
nagnitude  is  dangerous.  The  management  of 
such  a  business  needs  more  than  common  industry 
and  more  than  common  ability.  But  there  is  no 
security  at  all  that  these  will  be  regularly  continued 
in  each  generation.  The  case  of  Overend,  Gurney 
and  Co.,  the  model  instance  of  all  evil  in  business, 
is  a  most  alarming  example  of  this  evil.  No 
cleverer  men  of  business  probably  (cleverer  I  mean 
for  the  purposes  of  their  particular  calling)  could 
well  be  found  than  the  founders  and  first  managers 
of  that  house.  But  in  a  very  few  years  the  rule  in 
it  passed  to  a  generation  whose  folly  surpassed  the 
usual  limit  of  imaginable  incapacity.  In  a  short 
time  they  substituted  ruin  for  prosperity  and 
changed  opulence  into  insolvency.  Such  great 
folly  is  happily  rare  ;  and  the  business  of  a  bank  is 
not  nearly  as  difficult  as  the  business  of  a  discount 
company.  Still  much  folly  is  common,  and  the 
business  of  a  great  bank  requires  a  great  deal  of 
ability,  and  an  even  rarer  degree  of  trained  and 
sober  judgment.  That  which  happened  so  marvel- 
ously  in  the  green  tree  may  happen  also  in  the 

dry.     A  great  private  bank  might  easily  become 
13* 


274  THE  PRIVATE  BANKS. 

very  rotten  by  a  change  from  discretion  to  foolish* 
ness  in  those  who  conduct  it. 

We  have  had  as  yet  in  London,  happily,  no 
example  of  this ;  indeed,  we  have  hardly  as  yet  had 
the  opportunity.  Till  now  private  banks  have 
been  small ;  small  as  we  now  reckon  banks.  For 
their  exigencies  a  moderate  degree  of  ability  and 
an  anxious  caution  will  suffice.  But  if  the  size  of 
the  banks  is  augmented  and  greater  ability  is  re- 
quired, the  constant  difficulty  of  an  hereditary 
government  will  begin  to  be  felt.  '  The  father 
had  great  brains  and  created  the  business :  but  the 
son  had  less  brains  and  lost  or  lessened  it.'  This 
is  the  history  of  all  great  monarchies,  and  it  may 
be  the  history  of  great  private  banks.  The 
peculiarity  in  the  case  of  Overend,  Gurney  and 
Co. — at  least,  one  peculiarity — is  that  the  evil  was 
soon  discovered.  The  richest  partners  had  least 
concern  in  the  management ;  and  when  they  found 
that  incredible  losses  were  ruining  them,  they 
stopped  the  concern  and  turned  it  into  a  company. 
But  they  had  done  nothing ;  if  at  least  they  had 
only  prevented  farther  losses,  the  firm  might  have 
been  in  existence  and  in  the  highest  credit  now. 
It  was  the  publicity  of  their  losses  which  ruined 
them.  But  if  they  had  continued  to  be  a  private 
partnership  they  need  not  have  disclosed  those 


THE  PRIVATE  BANKS.  2?$ 

losses  :  they  might  have  written  them  off  quietly 
out  of  the  immense  profits  they  could  have  accu- 
mulated. They  had  some  ten  millions  of  other 
people's  money  in  their  hands  which  no  one  thought 
of  disturbing.  The  perturbation  through  the 
country  which  their  failure  caused  in  the  end,  shows 
how  diffused  and  how  unimpaired  their  popular 
reputation  was.  No  one  in  the  rural  districts  (as 
I  know  by  experience)  would  ever  believe  a  word 
against  them,  say  what  you  might.  The  catas- 
trophe came  because  at  the  change  the  partners  in 
the  old  piivate  firm — the  Gurney  family  espe- 
cially— had  guaranteed  the  new  company  against 
the  previous  losses:  those  losses  turned  out  to  be 
much  greater  than  was  expected.  To  pay  what 
was  necessary  the  '  Gurneys '  had  to  sell  their  es- 
tates, and  their  visible  ruin  destroyed  the  credit 
of  the  concern.  But  if  there  had  been  no  such 
guarantee,  and  no  sale  of  estates, — if  the  great 
losses  had  slept  a  quiet  sleep  in  a  hidden  ledger, 
—no  one  would  have  been  alarmed,  and  the  credit 
and  the  business  of  '  Overends '  might  have  exist- 
ed till  now,  and  their  name  still  continued  to  be 
one  of  our  first  names.  The  difficulty  of  propa- 
gating a  good  management  by  inheritance  for 
generations  is  greatest  in  private  banks  and  dis- 
count firms  because  of  their  essential  secrecy. 


276  THE  PRIVATE  BANKS. 

The  danger  may  indeed  be  surmounted  by  the 
continual  infusion  of  new  and  able  partners.  The 
deterioration  of  the  old  blood  maybe  compensated 
by  the  excellent  quality  of  the  fresh  blood.  But  to 
this  again  there  is  an  objection,  of  little  value  per- 
haps in  seeming,  but  of  much  real  influence  in 
practice.  The  infusion  of  new  partners  requires 
from  the  old  partners  a  considerable  sacrifice  of 
income  ;  the  old  must  give  up  that  which  the  new 
receive,  and  the  old  will  not  like  this.  The 
effectual  remedy  is  so  painful  that  I  fear  it  often 
may  be  postponed  too  long. 

I  cannot,  therefore,  expect  with  certainty  the 
continuance  of  our  system  of  private  banking.  I 
am  sure  that  the  days  of  small  banks  will  before 
many  years  come  to  an  end,  and  that  the  diffi- 
culties of  large  private  banks  are  very  important. 
In  the  mean  time  it  is  very  important'  that  large 
private  banks  should  be  well  managed.  And  the 
present  state  of  banking  makes  this  peculiarly 
difficult.  The  detail  of  the  business  is  augmenting 
with  an  overwhelming  rapidity.  More  cheques  are 
drawn  year  by  year ;  not  only  more  absolutely,  but 
more  by  each  person,  and  more  in  proportion  to 
his  income.  The  payments  in,  and  payments  out  ot 
a  common  account  are  very  much  more  numerous 
than  they  formerly  were.  And  this  causes  an 


THE  PRIVATE   BANKS. 

enormous  growth  of  detail.  And  besides,  bankers 
have  of  late  begun  almost  a  new  business.  They 
now  not  only  keep  people's  money,  but  also  collect 
their  incomes  for  them.  Many  persons  live  en- 
tirely on  the  income  of  shares,  or  debentures,  or 
foreign  bonds,  which  is  paid  in  coupons,  and 
these  are  handed  in  for  the  bank  to  collect.  Often 
enough  the  debenture,  or  the  certificate,  or  the 
bond  is  in  the  custody  of  the  banker,  and  he  is 
expected  to  see  when  the  coupon  is  due,  and  to 
cut  it  off  and  transmit  it  for  payment.  And  the 
detail  of  all  this  is  incredible,  and  it  needs  a  special 
machinery  to  cope  with  it. 

A  large  joint  stock  bank,  if  well-worked,  has 
that  machinery.  It  has  at  the  head  of  the  execu- 
tive a  general  manager  who  was  tried  in  the  detail 
of  banking,  who  is  devoted  to  it,  and  who  is  con- 
tent to  live  almost  wholly  in  it.  He  thinks  of  little 
else,  and  ought  to  think  of  little  else.  One  of  his 
first  duties  is  to  form  a  hierarchy  of  inferior  offi- 
cers, whose  respective  duties  are  defined,  and  to 
see  that  they  can  perform  and  do  perform  those 
duties.  But  a  private  bank  of  the  type  usual  in 
London  has  no  such  officer.  It  is  managed  by  the 
partners  ;  now  these  are  generally  rich  men,  are 
seldom  able  to  grapple  with  great  business  of  de- 
tail, and  are  not  disposed  to  spend  their  whole 


278  THE  PRIVATE  BANKS. 

lives  and  devote  their  entire  minds  to  it  if  they 
were  able.  A  person  with  the  accumulated  wealth, 
the  education,  and  the  social  place  of  a  great  Lon- 
don banker  would  be  a  fool  so  to  devote  himself, 
He  would  sacrifice  a  suitable  and  a  pleasant  life 
for  an  unpleasant  and  an  unsuitable  life.  But  still 
the  detail  must  be  well  done  ;  and  some  one  must 
be  specially  chosen  to  watch  it  and  to  preside  over 
it,  or  it  will  not  be  well  done.  Until  now,  or  until 
lately,  this  difficulty  has  not  been  fully  felt.  The 
detail  of  the  business  of  a  small  private  bank  was 
moderate  enough  to  be  superintended  effectually 
by  the  partners.  But,  as  has  been  said,  the  detail 
of  banking — the  proportion  of  detail  to  the  size  of 
the  bank — is  everywhere  increasing.  The  size  of 
the  private  banks  will  have  to  augment  if  private 
banks  are  not  to  cease  ;  and  therefore  the  neces- 
sity of  a  good  organisation  for  detail  is  urgent. 
If  the  bank  grows,  and  simultaneously  the  detail 
grows  in  proportion  to  the  bank,  a  frightful  con- 
fusion is  near  unless  care  be  taken. 

The  only  organisation  which  I  can  imagine  to 
be  effectual  is  that  which  exists  in  the  antagonistic 
establishments.  The  great  private  banks  will 
have,  I  believe,  to  appoint  in  some  form  or  other, 
and  under  some  name  or  other,  some  species  of 


THE  PRIVATE  BANKS.  2/9 

general  manager  who  will  watch,  contrive,  and 
arrange  the  detail  for  them.  The  precise  shape 
of  the  organisation  is  immaterial ;  each  bank  may 
have  its  own  shape,  but  the  man  must  be  there. 
The  true  business  of  the  private  partners  in  such 
a  bank  is  much  that  of  the  directors  in  a  joint 
stock  bank.  They  should  form  a  permanent 
committee  to  consult  with  their  general  manager 
to  watch  him,  and  to  attend  to  large  loans  and 
points  of  principle.  They  should  not  themselves 
be  responsible  for  detail ;  if  they  do  there  will  be 
two  evils  at  once  :  the  detail  will  be  done  badly, 
and  the  minds  of  those  who  ought  to  decide  prin- 
cipal things  will  be  distracted  from  those  principal 
things.  There  will  be  a  continual  worry  in  the 
bank,  and  in  a  worry  bad  loans  are  apt  to  be  made 
and  money  is  apt  to  be  lost. 

A  subsidiary  advantage  of  this  organisation  is 
that  it  would  render  the  transition  from  private 
banking  to  joint  stock  banking  easier,  if  that 
transition  should  be  necessary.  The  one  might 
merge  in  the  other  as  convenience  suggested  and 
as  events  required.  There  is  nothing  intrusive  in 
discussing  this  subject.  The  organisation  of  the 
private  is  just  like  that  of  the  joint  stock  banks  ; 
all  the  public  are  interested  that  it  should  be  good, 


2 80  THE   PRIVATE  BANKS. 

The  want  of  a  good  organisation  may  cause  the. 
failure  of  one  or  more  of  these  banks ;  and  such 
failure  of  such  banks  may  intensify  a  panic,  even 
if  it  should  not  cause  one. 


CHAPTER    XL 

THE     BILL-BROKERS. 

UNDER  every  system  of  banking,  whether  that  in 
which  the  reserve  is  kept  in  many  banks,  or  one 
in  which  it  is  kept  in  a  single  bank  only,  there 
will  always  be  a  class  of  persons  who  examine 
more  carefully  than  busy  bankers  can  the  nature 
of  different  securities ;  and  who,  by  attending  only 
to  one  class,  come  to  be  particularly  well  ac- 
quainted with  that  class.  And  as  these  specially 
qualified  dealers  can  for  the  most  part  lend  much 
more  than  their  own  capital,  they  will  always  be 
ready  to  borrow  largely  from  bankers  and  others, 
and  to  deposit  the  securities  which  they  know  to  be 
good  as  a  pledge  for  the  loan.  They  act  thus  as 
intermediaries  between  the  borrowing  public  and 
the  less  qualified  capitalist ;  knowing  better  than 
the  ordinary  capitalist  which  loans  are  better  and 
which  are  worse,  they  borrow  from  him,  and  gain 
a  profit  by  charging  to  the  public  more  than  they 
pay  to  him. 


282  THE  BILL-BROKERS. 

Many  stock  brokers  transact  such  business  upon 
a  great  scale.  They  lend  large  sums  on  foreign 
bonds  or  railway  shares  or  other  such  securities, 
and  borrow  those  sums  from  bankers,  depositing 
the  securities  with  the  bankers,  and  generally, 
though  not  always,  giving  their  guarantee.  But 
by  far  the  greatest  of  these  intermediate  dealers 
are  the  bill-brokers.  Mercantile  bills  are  an  ex- 
ceedingly difficult  kind  of  security  to  understand. 
The  relative  credit  of  different  merchants  is  a 
great '  tradition ' ;  it  is  a  large  mass  of  most  valuable 
knowledge  which  has  never  been  described  in 
books  and  is  probably  incapable  of  being  so 
described.  The  subject  matter  of  it,  too,  is  shift- 
ing and  changing  daily ;  an  accurate  representa- 
tion of  the  trustworthiness  of  houses  at  the  begin- 
ning of  a  year  might  easily  be  a  most  fatal  represen- 
tation at  the  end  of  it.  In  all  years  there  are  great 
changes  ;  some  houses  rise  a  good  deal  and  some 
fall.  And  in  some  particular  years  the  changes 
are  immense  ;  in -years  like  1871  many  active  men 
make  so  much  money  that  at  the  end  of  the  year 
they  are  worth}'  of  altogether  greater  credit  than 
anyone  would  have  dreamed  of  giving  to  them  at 
the  beginning.  On  the  other  hand,  in  years  like 
1866  a  contagious  riin  destroys  the  trustworthi- 
ness of  very  many  firms  and  persons,  and  often, 


THE  BILL-BROKERS.  283 

especially,  of  many  who  stood  highest  immediately 
before.  Such  years  alter  altogether  an  important 
part  of  the  mercantile  world :  the  final  question 
of  bill-brokers,  '  which  bills  will  be  paid  and  which 
will  not  ?  which  bills  are  second-rate  and  which 
first-rate  ?  '  would  be  answered  very  differently  at 
the  beginning  of  the  year  and  at  the  end.  No  one 
can  be  a  good  bill-broker  who  has  not  learnt  the 
great  mercantile  tradition  of  what  is  called  *  the 
standing  of  parties/  and  who  does  not  watch 
personally  and  incessantly  the  inevitable  changes 
which  from  hour  to  hour  impair  the  truth  of  that 
tradition.  The  'credit'  of  a  person — that  is,  the 
reliance  which  may  be  placed  on  his  pecuniary 
fidelity — is  a  different  thing  from  his  property. 
No  doubt,  other  things  being  equal,  a  rich  man  is 
more  likely  to  pay  than  a  poor  man.  But  on  the 
other  hand,  there  are  many  men  not  of  much 
wealth  who  are  trusted  in  the  market,  '  as  a  matter 
of  business,'  for  sums  much  exceeding  the  wealth 
of  those  who  are  many  times  richer.  A  firm  or 
a  person  who  have  been  long  known  to  'meet 
their  engagements,'  inspire  a  degree  of  confidence 
not  dependent  on  the  quantity  of  his  or  their  pro- 
perty. Persons  who  buy  to  sell  again  soon  are  often 
liable  for  amounts  altogether  much  greater  than 
their  own  capital ;  and  the  power  of  obtaining  those 


2 84  THE  BILL-BROKERS. 

sums  depends  upon  their  *'  respectability,'  their 
*  standing,'  and  their  '  credit,'  as  the  technical 
terms  express  it,  and  more  simply  upon  the 
opinion  which  those  who  deal  with  them  have 
formed  of  them.  The  principal  mode  in  which 
money  is  raised  by  traders  is  by '  bills  of  exchange ; ' 
the  estimated  certainty  of  their  paying  those  bills 
on  the  day  they  fall  due  is  the  measure  of  their 
credit ;  and  those  who  estimate  that  liability  best, 
the  only  persons  indeed  who  can  estimate  it 
exceedingly  well,  are  the  bill-brokers.  And  these 
dealers,  taking  advantage  of  their  peculiar  knowl- 
edge, borrow  immense  sums  from  bankers  and 
others  ;  they  generally  deposit  the  bills  as  a 
security ;  and  they  generally  give  their  own 
guarantee  of  the  goodness  of  the  bill :  but  neither 
of  such  practices  indeed  is  essential,  though  both 
are  the  ordinary  rule.  When  O  verends  failed,  as  I 
have  said  before,  they  had  borrowed  in  this  way 
very  largely.  There  are  others  now  in  the  trade 
who  have  borrowed  quite  as  much. 

As  is  usually  the  case,  this  kind  of  business  has 
grown  up  only  gradually.  In  the  year  1810  there 
was  no  such  business  precisely  answering  to  what 
we  now  call  bill-broking  in  London.  Mr.  Richard- 
son, the  principal  '  bill-broker '  of  the  time,  as  the 
term  was  then  understood,  thus  described  his 
business  to  the  '  Bullion  Committee  :  — ' 


THE  BILL-BROKERS.  285 

'  What  is  the  nature  of  the  agency  for  country 
banks  ? — It  is  twofold :  in  the  first  place  to  pro. 
cure  money  for  country  bankers  on  bills  when 
they  have  occasion  to  borrow  on  discount,  which 
is  not  often  the  case;  and  in  the  next  place,  to 
lend  the  money  for  the  country  bankers  on  bills  on . 
discount.  The  sums  of  money  which  I  lend  for 
country  bankers  on  discount  are  fifty  times  more 
than  the  sums  borrowed  for  country  bankers. 

'  Do  you  send  London  bills  into  the  country  for 
discount  ? — Yes. 

'  Do  you  receive  bills  from  the  country  upon 
London  in  return,  at  a  date,  to  be  discounted  ?— 
Yes,  to  a  very  considerable  amount,  from  particular 
parts  of  the  country. 

'  Are  not  both  sets  of  bills  by  this  means  under 
discount  ? — No,  the  bills  received  from  one  part 
of  the  country  are  sent  down  to  another  part  for 
discount. 

'  And  they  are  not  discounted  in  London  ? — No. 
In  some  parts  of  the  country  there  is  but  little 
circulation  of  bills  drawn  upon  London,  as  in  Nor- 
folk, Suffolk,  Essex,  Sussex,  &c. ;  but  there  is  there 
a  considerable  circulation  in  country  bank-notes, 
principally  optional  notes.  In  Lancashire  there  is 
little  or  no  circulation  of  country  bank-notes  ;  but 
there  is  a  great  circulation  of  bills  drawn  upon 
London  at  two  or  three  months'  date.  I  receive 


286  THE   BILL-BROKERS. 

bills  to  a  considerable  amount  from  Lancashire  in 
particular,  and  remit  them  to  Norfolk,  Suffolk,  &c., 
where  the  bankers  have  large  lodgments,  and 
much  surplus  money  to  advance  on  bills  for  dis- 
count.' 

Mr.  Richardson  was  only  a  broker  who  found 
money  for  bills  and  bills  for  money.  He  is  further 
asked : 

'  Do  you  guarantee  the  bills  you  discount,  and 
what  is  your  charge  per  cent.  ? — No,  we  do  not 
guarantee  them  ;  our  charge  is  one-eighth  per 
cent,  brokerage  upon  the  bill  discounted — but  we 
make  no  charge  to  the  lender  of  the  money. 

'  Do  you  consider  that  brokerage  as  a  compen- 
sation for  the  skill  which  you  exercise  in  selecting 
the  bills  which  you  thus  get  discounted? — Yes, 
for  selecting  of  the  bills,  writing  letters,  and  other 
trouble. 

'  Does  the  party  who  furnishes  the  money  give 
you  any  kind  of  compensation  ? — None  at  all. 

'  Does  he  not  consider  you  as  his  agent,  and  in 
some  degree  responsible  for  the  safety  of  the  bills 
which  you  give  him  ? — Not  at  all. 

'  Does  he  not  prefer  you  on  the  score  of  his 
judging  that  you  will  give  him  good  intelligence 
upon  that  subject  ? — Yes,  he  relies  upon  us. 

'  Do  you  then  exercise  a  discretion  as  to  the 
probable  safety  of  the  bills  ? — Yes  -  if  a  bill  comes 


THE  BILL-BROKERS.  28? 

to  us  which  we  conceive  not  to  be  safe,  we  return 
it. 

'  Do  you  not  then  conceive  yourselves  to  depend 
in  a  great  measure  for  the  quantity  of  business 
which  you  can  perform  on  the  favour  of  the  party 
lending1  the  money  ? — Yes,  very  much  so.  If  we 
manage  our  business  well,  we  retain  our  friends  ; 
if  we  do  not,  we  lose  them.' 

It  was  natural  enough  that  the  owners  of  the 
money  should  not  pay,  though  the  owner  of  the 
bill  did,  for  in  almost  all  ages  the  borrower  has 
been  a  seeker  more  or  less  anxious ;  he  has 
always  been  ready  to  pay  for  those  who  will  find 
him  the  money  he  is  in  search  of.  But  the 
possessor  of  money  has  rarely  been  willing  to  pay 
anything ;  he  has  usually  and  rightly  believed 
that  the  borrower  would  discover  him  soon. 

Notwithstanding  other  changes,  the  distribution 
of  the  customers  of  the  bill-brokers  in  different 
parts  of  the  country  still  remains  much  as  Mr. 
Richardson  described  it  sixty  years  ago.  For  the 
most  part,  agricultural  counties  do  not  employ  as 
much  money  as  they  save ;  manufacturing  counties, 
on  the  other  hand,  can  employ  much  more  than 
they  save  ;  and  therefore  the  money  of  Norfolk 
or  of  Somersetshire  is  deposited  with  the  London 
bill-brokers,  who  use  it  to  discount  the  bills  of 
Lancashire  and  Yorkshire. 


288  THE  BILL-BROKERS. 

The  old  practice  of  bill-broking,  which  Mr. 
Richardson  describes,  also  still  exists.  There  are 
many  brokers  to  be  seen  about  Lombard  Street  with 
hills  which  they  wish  to  discount  but  which  they 
do  not  guarantee.  They  have  sometimes  dis- 
counted these  bills  with  their  own  capital,  and  il 
they  can  re-discount  them  at  a  slightly  lower  rate 
they  gain  a  difference  which  at  first  seems  but 
trifling,  but  with  which  they  are  quite  content, 
because  this  system  of  lending  first  and  borrowing 
again  immediately  enables  them  to  turn  their 
capital  very  frequently,  and  on  a  few  thousand 
pounds  of  capital  to  discount  hundreds  of  thou- 
sands of  bills  ;  as  the  transactions  are  so  many, 
they  can  be  content  with  a  smaller  profit  on 
each.  In  other  cases,  these  non-guaranteeing 
brokers  are  only  agents  who  are  seeking  money 
for  bills  which  they  have  undertaken  to  get  dis- 
counted. But  in  either  case,  as  far  as  the  banker 
or  other  ultimate  capitalist  is  concerned,  the  trans- 
action is  essentially  that  which  Mr.  Richardson 
describes.  The  loan  by  such  banker  is  a  re- 
discount of  the  bill;  that  banker  cannot  obtain 
repayment  of  that  loan,  except  by  the  payment  of 
the  bill  at  maturity.  He  has  no  claim  upon  the 
agent  who  brought  him  the  bill.  Bill-broking,  in 
this  which  we  may  call  its  archaic  form,  is  simply 


THE  DILL-BROKERS.  289 

one  of  the  modes  in  which  bankers  obtain  bills 
which  are  acceptable  to  them  and  which  they  re- 
discount. No  reference  is  made  in  it  to  the  credit 
of  the  bill-broker ;  the  bills  being  discounted  'with- 
out recourse '  to  him  are  as  good  if  taken  from  a 
pauper  as  if  taken  from  a  millionaire.  The  lender 
exercises  his  own  judgment  on  the  goodness  of  the 
bill. 

But  in  modern  bill-broking  the  credit  of  the  bill- 
broker  is  a  vital  element.  The  lender  considers 
that  the  bill-broker — no  matter  whether  an  indi- 
vidual, a  company,  or  a  firm — has  considerable 
wealth,  and  he  takes  the  'bills/  relying  that  the 
broker  would  not  venture  that  wealth  by  guaran- 
teeing them  unless  he  thought  them  good.  The 
lender  thinks,  too,  that  the  bill-broker  being  daily 
conversant  with  bills  and  bills  only,  knows  probably 
all  about  bills :  he  lends  partly  in  reliance  on  the 
wealth  of  the  broker  and  partly  in  reliance 
on  his  skill.  He  does  not  exercise  much  judg- 
ment of  his  own  on  the  bills  deposited  with 
him  :  he  often  does  not  watch  them  very  closely. 
Probably  not  one-thousandth  part  of  the  creditors 
on  security  of  Overend,  Gurney  and  Co.,  had 
ever  expected  to  have  to  rely  on  that  security, 
or  had  ever  given  much  real  attention  to  it. 

Sometimes,  indeed,  the   confidence   in   the   bill- 
is 


290  THE  BILL-BROKERS. 

brokers  goes  farther.  A  considerable  number  of 
persons  lend  to  them,  not  only  without  much 
looking  at  the  security  but  even  without  taking 
any  security.  This  is  the  exact  reverse  of  the 
practice  which  Mr.  Richardson  described  in  1810  ; 
then  the  lender  relied  wholly  on  the  goodness  oi 
the  bill,  now,  in  these  particular  cases,  he  relies 
solely  on  the  bill-broker,  and  does  not  take  a  bill 
in  any  shape.  Nothing  can  be  more  natural  or 
more  inevitable  than  this  change.  It  was  certain 
that  the  bill-broker,  being  supposed  to  understand 
bills  well,  would  be  asked  by  the  lenders  to  evince 
his  reliance  on  the  bills  he  offered  by  giving  a 
guarantee  for  them.  It  was  also  most  natura.1 
that  the  bill-brokers,  having  by  the  constant 
practice  of  this  lucrative  trade  obtained  high 
'  standing  and  acquired  great  wealth,  should  become, 
more  or  less,  bankers  too,  and  should  receive 
money  on  deposit  without  giving  any  security  for  it. 
But  the  effects  of  the  change  have  been  very 
remarkable.  In  the  practice  as  Mr.  Richardson 
described  it,  there  is  no  peculiarity  very  likely  to 
affect  the  money  market.  The  bill-broker  brought 
bills  to  the  banker,  just  as  others  brought  them  , 
nothing  at  all  could  be  said  as  to  it  except  that  the 
Bank  must  not  discount  bad  bills,  must  not  discount 
too  ma:iy  bills,  and  must  keep  a  good  reserve 


THE   ft  ILL-BROKERS.  291 

But  the  modern  practice  introduces  more  complex 
considerations.  In  the  trade  of  bill-broking,  as  it 
now  exists,  there  is  one  great  difficulty  ;  the  bill- 
broker  has  to  pay  interest  for  all  the  money  which 
he  receives.  How  this  arose  we  have  just  seen. 
The  present  lender  to  the  bill-broker  at  first  always 
used  to  discount  a  bill,  which  is  as  much  as  saying 
that  he  was  always  a  lender  at  interest.  When  he 
came  to  take  the  guarantee  of  the  broker,  and 
only  to  look  at  the  bills  as  a  collateral  security, 
naturally  he  did  not  forego  his  interest :  still  less 
did  he  forego  it  when  he  ceased  to  take  security 
at  all.  The  bill-broker  has,  in  one  shape  or  other, 
to  pay  interest  on  every  sixpence  left  with  him, 
and  that  constant  habit  of  giving  interest  has  this 
grave  consequence: — the  bill-broker  cannot  afford 
to  keep  much  money  unemployed.  He  has  become 
a  banker  owing  large  sums  which  he  may  be 
called  on  to  repay,  but  he  cannot  hold  as  much  as 
an  ordinary  banker,  or  nearly  as  much,  of  such 
sums  in  cash,  because  the  loss  of  interest  wouldv 
ruin  him.  Competition  reduces  the  rate  which  the\ 
bill-broker  can  charge,  and  raises  the  rate  which 
the  bill-broker  must  give,  so  that  he  has  to  live 
on  a  difference  exceedingly  narrow.  And  if  he 
constantly  kept  a  large  hoard  of  barren  money  he 
would  soon  be  found  in  the  '  Gazette.' 


292  THE  BILL  BROKERS. 

The  difficulty  is  aggravated  by  the  terms  upon 
which  a  great  part  of  the  money  at  the  bill-brokers 
is  deposited  with  .them.  Very  much  of  it  is  re- 
payable at  demand,  or  at  very  short  notice. 
The  demands  on  a  broker  in  periods  of  alarm  may 
consequently  be  very  great,  and  in  practice  they 
often  are  so.  In  times  of  panic  there  is  always 
a  very  heavy  call,  if  not  a  run  upon  them  ;  and  in 
consequence  of  the  essential  nature  of  their 
business,  they  cannot  constantly  keep  a  large 
unemployed  reserve  of  their  own  in  actual  cash, 
they  are  obliged  to  ask  help  of  some  one  who 
possesses  that  cash.  By  the  conditions  of  his 
trade,  the  bill-broker  is  forced  to  belong  to  a  class 
of  '  dependent  money-dealers,'  as  we  may  term 
them,  that  is,  of  dealers  who  do  not  keep  their 
own  reserve,  and  must,  therefore,  at  every  crisis 
of  great  difficulty  revert  to  others. 

In  a  natural  state  of  banking,  that  in  which  all 
the  principal  banks  kept  their  own  reserve,  this 
demand  of  the  bill-brokers  and  other  dependent 
dealers  would  be  one  of  the  principal  calls  on  that 
reserve.  At  every  period  of  incipient  panic  the 
holders  of  it  would  perceive  that  it  was  of  great 
importance  to  themselves  to  support  these  de- 
pendent dealers.  If  the  panic  destroyed  those 
dealers  it  would  grow  by  what  it  fed  upon  (as  is 


THE  BILL-BROKERS. 


293 


its  nature),  and  might  probably  destroy  also  the 
bankers,  the  holders  of  the  reserve.  The  public 
terror  at  such  times  is  indiscriminate.  When  one 
house  of  good  credit  has  perished,  other  houses 
of  equal  credit  though  of  different  nature  are  in 
danger  of  perishing.  The  many  holders  of  the 
banking  reserve  would  under  the  natural  system 
of  banking  be  obliged  to  advance  out  of  that  re- 
serve to  uphold  bill-brokers  and  similar  dealers. 
It  would  be  essential  to  their  own  preservation 
not  to  let  such  dealers  fail,  and  the  protection  of 
such  dealers  would  therefore  be  reckoned  among 
the  necessary  purposes  for  which  they  retained 
that  reserve. 

Nor  probably  would  the  demands  on  the  bill- 
brokers  in  such  a  system  of  banking  be  exceed- 
ingly formidable.  Considerable  sums  would  no 
doubt  be  drawn  from  them,  but  there  would  be 
no  special  reason  why  money  should  be  de- 
manded from  them  more  than  from  any  other 
money  dealers.  They  would  share  the  panic  with 
the  bankers  who  kept  the  reserve,  but  they  would 
not  feel  it  more  than  the  bankers.  In  each 
crisis  the  set  of  the  storm  would  be  determined 
by  the  cause  which  had  excited  it,  but  there  would 
not  be  anything  in  the  nature  of  bill-broking  to 
attract  the  advance  of  the  alarm  peculiarly  to  them. 


THE  BILL-BROKERS. 

They  would  not  be  more  likely  to  suffer  than 
other  persons  ;  the  only  difference  would  be  that 
when  they  did  surfer,  having  no  adequate  reserve 
of  their  own,  they  would  be  obliged  to  ask  the  aid 
of  others. 

But  under  a  0#£-reserve  system  of  banking,  the 
position  of  the  bill-brokers  is  much  more  singular 
and  much  more  precarious.  In  fact,  in  Lombard 
Street,  the  principal  depositors  of  the  bill-brokers 
are  the  bankers,  whether  of  London,  or  of  provin- 
cial England,  or  of  Scotland,  or  Ireland.  Such 
deposits  are,  in  fact,  a  portion  of  the  reserve  of 
these  bankers  ;  they  make  an  essential  part  of  the 
sums  which  they  have  provided  and  laid  by  against 
a  panic.  Accordingly,  in  every  panic  these  sums 
are  sure  to  be  called  in  from  the  bill-brokers ;  they 
were  wanted  to  be  used  by  their  owners  in  time 
of  panic,  and  in  time  of  panic  they  ask  for  them. 
'  Perhaps  it  may  be  interesting/  said  Alderman 
Salomons,  speaking  on  behalf  of  the  London  and 
Westminster  Bank,  after  the  panic  of  1857,  to  the 
committee,  *  to  know  that,  on  November  n,  we 
held  discounted  bills  for  brokers  to  the  amount 
of  5,623,ooo/.  Out  of  these  bills  2,8oo,ooo/.  ma- 
tured between  November  1 1  and  December  4  ; 
2,000,  ooo/.  nv;jre  between  December  1 1  and 
December  31  ;  consequently  we  were  prepared 


THE  BILL-BROKERS.  29$ 

merely  by  the  maturing  of  our  bills  of  exchange 
for  any  demand  that  might  come  upon  us.'  This 
is  not  indeed  a  direct  withdrawal  of  money  on 
deposit,  but  its  principal  effect  is  identical.  At 
the  beginning  of  the  time  the  London  and  West- 
minster Bank  had  lent  5,ooo,ooo/.  more  to  the 
bill-brokers  than  they  had  at  the  end  of  it ;  and 
that  5,ooo,ooo/.  the  bank  had  added  to  its  reserve 
against  a  time  of  difficulty. 

The  intensity  of  the  demand  on  the  bill-broker 
is  aggravated  therefore  by  our  peculiar  system  of 
banking.  Just  at  the  moment  when,  by  the 
nature  of  their  business,  they  have  to  resort  to  the 
reserves  of  bankers  for  necessary  support,  the 
bankers  remove  from  them  large  sums  in  order  to 
strengthen  those  reserves.  A  great  additional 
strain  is  thrown  upon  them  just  at  the  moment 
when  they  are  least  able  to  bear  it ;  and  it  is  thrown 
by  those  who  under  a  natural  system  of  banking 
would  not  aggravate  the  pressure  on  the  bill 
bokers,  but  relieve  it. 

And  the  profits  of  bill-broking  are  propor- 
tionably  raised.  The  reserves  of  the  bankers 
so  deposited  with  the  bill-broker  form  a  most 
profitable  part  of  his  business  ;  they  are  on  the 
whole  of  very  large  amount,  and  at  all  times,  ex- 
cept those  of  panic,  may  well  be  depended  upon., 


296  THE  BILL-BROKERS. 

The  bankers  are  pretty  sure  to  keep  them  there, 
just  because  they  must  keep  a  reserve,  and  they 
consider  it  one  of  the  best  places  in  which  to 
keep  it.  Under  a  more  natural  system,  no  part 
of  the  banking  reserve  would  ever  be  lodged  at 
the  brokers.  Bankers  would  deposit  with  the 
brokers  only  their  extra  money,  the  money  which 
they  considered  they  could  safely  lend,  and  which 
they  would  not  require  during  a  panic.  In  the 
eye  of  the  banker,  money  at  the  brokers  would 
then  be  one  of  the  investments  of  cash,  it 
would  not  be  a  part  of  such  cash.  The  deposits 
of  bill-brokers  and  the  profits  of  bill-broking  are 
increased  by  our  present  system,  just  in  propor- 
tion as  the  dangers  of  bill-brokers  during  a  panic 
are  increased  by  it. 

The  strain,  too,  on  our  banking  reserve  which 
is  caused  by  the  demands  of  the  bill-brokers,  is 
also  more  dangerous  than  it  would  be  under  a 
natural  system,  because  that  reserve  is  in  itself 
less.  The  system  of  keeping  the  entire  ultimate 
reserve  at  a  single  bank,  undoubtedly  diminishes 
the  amount  of  reserve  which  is  kept.  And  exactly 
on  that  very  account  the  danger  of  any  particular 
demand  on  that  reserve  is  augmented,  because  the 
magnitude  of  the  fund  upon  which  that  de« 
mand  falls  is  diminished.  So  that  our  one-reserve 


THE  BILL-BROKERS.  29? 

system  of  banking  combines  two  evils :  first,  it 
makes  the  demand  of  the  brokers  upon  the  final 
reserve  greater,  because  under  it  so  many  bankers 
remove  so  much  money  from  the  brokers ;  and 
under  it  also  the  final  reserve  is  reduced  to  its 
minimum  point,  and  the  entire  system  of  credit 
is  made  more  delicate,  and  more  sensitive.. 

The  peculiarity,  indeed,  of  the  effects  of  the 
one  reserve  is  indeed  even  greater  in  this  respect. 
Under  the  natural  system,  the  bill-brokers  would 
be  in  no  respect  the  rivals  of  the  bankers  which 
kept  the  ultimate  reserve.  They  would  be  rather 
the  agents  for  these  bankers  in  lending  upon  cer- 
tain securities  which  they  did  not  themselves  like, 
or  on  which  they  did  not  feel  competent  to  lend 
safely.  The  bankers  who  in  time  of  panic  had  to 
help  them  would  in  ordinary  times  derive  much 
advantage  from  them.  But  under  our  present  sys- 
tem all  this  is  reversed.  The  Bank  of  England 
never  deposits  any  money  with  the  bill-brokers  ; 
in  ordinary  times  it  never  derives  any  advantage 
from  them.  On  the  other  hand,  as  the  Bank 
carries  on  itself  a  large  discount  business,  as  it 
considers  that  it  is  itself  competent  to  lend  on  all 
kinds  of  bills,  the  bill-brokers  are  its  most 
formidable  rivals.  As  they  constantly  give  high 
rates  for  money  it  is  necessary  that  they  should 

13* 


298  THE  BILL-BROKERS. 

undersell  the  Bank,  and  in  ordinary  times  they  do 
undersell  it.  But  as  the  Bank  of  England  alone 
keeps  the  final  banking  reserve,  the  bill-brokers 
of  necessity  have  to  resort  to  that  final  reserve ; 
so  that  at  every  panic,  and  by  the  essential  consti- 
tution of  the  money  market,  the-  Bank  of  England 
has  to  help,  has  to  maintain  in  existence,  the 
dealers,  who  never  in  return  help  the  Bank  at 
any  time,  but  who  are  in  ordinary  times  its  closest 
competitors  and  its  keenest  rivals. 

It  might  be  expected  that  such  a  state  of  things 
would  cause  much  discontent  at  the  Bank  of 
England,  and  in  matter  of  fact  there  has  been 
much  discussion  about  it,  and  much  objection 
taken  to  it.  After  the  panic  of  1857,  this  was  so 
especially.  During  that  panic,  the  Bank  of 
England  advanced  to  the  bill-brokers  more  than 
9,ooo,ooo/.,  though  their  advances  to  bankers, 
whether  London  or  country,  were  only  8,ooo,ooo/. ; 
and,  not  unnaturally,  the  Bank  thought  it  un- 
reasonable that  so  large  an  inroad  upon  their 
resources  should  be  made  by  their  rivals.  In 
consequence,  in  1858  they  made  a  rule  that  they 
would  only  advance  to  the  bill-brokers  at  certain 
seasons  of  the  year,  when  the  public  money  i? 
particularly  large  at  the  bank,  and  that  at 
other  times  any  application  for  an  advance  should 


THE  BIiL-BROKERS.  299 

be  considered  exceptional,  and  dealt  with  accord, 
ingly.  And  the  object  of  that  regulation  was 
officially  stated  to  be  '  to  make  them  keep  their 
own  reserve,  and  not  to  be  dependent  on  the 
Bank  of  England.'  As  might  be  supposed,  this 
rule  was  exceedingly  unpopular  with  the  brokers, 
and  the  greatest  of  them,  Overend,  Gurney  and 
Co.,  resolved  on  a  strange  policy  in  the  hope  of 
abolishing  it.  They  thought  they  could  frighten 
the  Bank  of  England,  and  could  show  that  if 
they  were  dependent  on  it,  it  was  also  depen- 
dent on  them.  They  accordingly  accumulated 
a  large  deposit  at  the  Bank  to  the  amount 
of  3,ooo,ooo/.,  and  then  withdrew  it  all  at  once. 
But  this  policy  had  no  effect,  except  that  of  ex- 
citing a  distrust  of  '  Overends  '  :  the  credit  o' 
the  Bank  of  England  was  not  diminished ; 
Overends  had  to  return  the  money  in  a  few  days, 
and  had  the  dissatisfaction  of  feeling  that  they 
had  in  vain  attempted  to  assail  the  solid  basis  of 
everyone's  credit,  and  that  everyone  disliked  them 
for  doing  so.  But  though  this  ill-conceived 
attempt  failed  as  it  deserved,  the  rule  itself  could 
not  be  maintained.  The  Bank  does,  in  fact,  at 
every  period  of  pressure,  advance  to  the  bill- 
brokers  ;  the  case  may  be  considered  '  excep- 
tional/ but  the  advance  is  always  made  if  the 


30O  THE  BILL-BROKERS. 

security  offered  is  really  good.  However  much 
the  Bank  may  dislike  to  aid  their  rivals,  yet  they 
must  aid  them  ;  at  a  crisis  they  feel  that  they 
would  only  be  aggravating  incipient  demand,  and 
be  augmenting  the  probable  pressure  on  them- 
selves if  they  refused  to  do  so. 

I  shall  be  asked  if  this  anomaly  is  inevitable, 
and  I  am  afraid  that  for  practical  purposes 
we  must  consider  it  to  be  so.  It  may  be 
lessened ;  the  bill-brokers  may,  and  should, 
discourage  as  much  as  they  can  the  deposit  of 
money  with  them  on  demand,  and  encourage  the 
deposit  of  it  at  distant  fixed  dates  or  long  notice. 
This  will  diminish  the  anomaly,  but  it  will  not 
cure  it.  Practically,  bill-brokers  cannot  refuse  to 
receive  money  at  call.  In  every  market  a  dealer 
must  conduct  his  business  according  to  the 
custom  of  the  market,  or  he  will  not  be  able  to 
conduct  it  at  all.  All  the  bill-brokers  can  do  is 
to  offer  better  rates  for  more  permanent  money, 
and  this  (though  possibly  not  so  much  as  might 
be  wished)  they  do  at  present.  In  its  essence,  this 
anomaly  is,  I  believe,  an  inevitable  part  of  the 
system  of  banking  which  history  has  given  us, 
and  which  we  have  only  to  make  the  best  of,  since 
we  cannot  alter  it. 


CHAPTER    XII. 

THE  PRINCIPLES  WHICH  SHOULD  REGULATE  THE 
AMOUNT  OF  THE  BANKING  RESERVE  TO  BE  KEPT 
BY  THE  BANK  OF  ENGLAND. 

THERE  is  a  very  common  notion  that  the  amount 
of  the  reserve  which  the  Bank  of  England  ought 
to  keep  can  be  determined  at  once  from  the  face 
of  their  weekly  balance  sheet.  It  is  imagined 
that  you  have  only  to  take  the  liabilities  of  the 
Banking  department,  and  that  a  third  or  some 
other  fixed  proportion  will  in  all  cases  be  the 
amount  of  reserve  which  the  Bank  should  keep 
against  those  liabilities.  But  to  this  there  are 
several  objections,  some  arising  from  the  general 
nature  of  the  banking  trade,  and  others  from  the 
special  position  of  the  Bank  of  England. 

That  the  amount  of  the  liabilities  of  a  bank 
is  a  principal  element  in  determining  the  proper 
amount  of  its  reserve  is  plainly  true  ;  but  that  it 
is  the  only  element  by  which  that  amount  is 


302 


THE  PRINCIPLES    WHICH  SHOULD  REGULATE 


determined  is  plainly  false.  The  intrinsic  nature 
of  these  liabilities  must  be  considered,  as  well 
as  their  numerical  quantity.  For  example,  no 
one  would  say  that  the  same  amount  of  reserve 
ought  to  be  kept  against  acceptances  which  can« 
not  be  paid  except  at  a  certain  day,  and  against 
deposits  at  call,  which  may  be  demanded  at 
any  moment.  If  a  bank  groups  these  liabilities 
together  in  the  balance-sheet,  you  cannot  tell  the 
amount  of  reserve  it  ought  to  keep.  The  neces- 
sary information  is  not  given  you. 

Nor  can  you  certainly  determine  the  amount  o* 
reserve  necessary  to  be  kept  against  deposits 
unless  you  know  something  as  to  the  nature  o' 
these  deposits.  If  out  of  3,ooo,ooo/.  of  money, 
one  depositor  has  i,ooo,ooo/.  to  his  credit,  and 
may  draw  it  out  when  he  pleases,  a  much  larger 
reserve  will  be  necessary  against  that  liability  oi 
i,ooo,ooo/.  than  against  the  remaining  2,ooo,ooo/. 
The  intensity  of  the  liability,  so  to  say,  is  much 
greater ;  and  therefore  the  provision  in  store 
must  be  much  greater  also.  On  the  other  hand, 
supposing  that  this  single  depositor  is  one  of  cal 
culable  habits — suppose  that  it  is  a  public  body, 
the  time  of  whose  demands  is  known,  and  the 
time  of  whose  receipts  is  known  also — this  single 
liability  requires  a  less  reserve  than  that  of  an- 


THE  AMOUNT  OF   THE  BANK'S  RESERVE.       303 

equal  amount  of  ordinary  liabilities.  The  danger 
that  it  will  be  called  for  is  much  less  ;  and  there- 
fore the  security  taken  against  it  may  be  much  less 
too.  Unless  the  quality  of  the  liabilities  is  con- 
sidered as  well  as  their  quantity,  the  due  provision 
for  their  payment  cannot  be  determined. 

These  are  general  truths  as  to  all  banks,  and 
they  have  a  very  particular  application  to  the 
Bank  of  England.  The  first  application  is  fa- 
vourable to  the  Bank  ;  for  it  shows  the  danger 
of  one  of  the  principal  liabilities  to  be  much 
smaller  than  it  seems.  The  largest  account  at 
the  Bank  of  England  is  that  of  the  English 
Government ;  and  probably  there  has  never  been 
any  account  of  which  it  was  so  easy  in  time  of 
peace  to  calculate  the  course.  All  the  material 
facts  relative  to  the  English  revenue,  and  the 
English  expenditure,  are  exceedingly  well  known; 
and  the  amount  of  the  coming  payments  to  and 
from  this  account  are  always,  except  in  war 
times,  to  be  calculated  with  wonderful  accuracy.  In 
war,  no  doubt,  this  is  all  reversed  ;  the  account  of 
a  government  at  war  is  probably  the  most  un- 
certain of  all  accounts,  especially  of  a  government 
of  a  scattered  empire,  like  the  English,  whose 
places  of  outlay  in  time  of  war  are  so  many  and 
so  distant,  and  the  amount  of  whose  payments  is 


304  THE  PRINCIPLES    WHICH  SHOULD   REGULATE 

therefore  so  incalculable.  Ordinarily,  however, 
there  is  no  account  of  which  the  course  can 
be  so  easily  predicted ;  and  therefore  no  ac- 
count which  needs  in  ordinary  times  so  little 
reserve.  The  principal  payments,  when  they 
are  made,  are  also  of  the  most  satisfactory 
kind  to  a  banker ;  they  are,  to  a  great  extent, 
made  to  another  account  at  his  bank.  These 
largest  ordinary  payments  of  the  Government  are 
the  dividends  on  the  debt,  and  these  are  mostly 
made  to  bankers  who  act  as  agents  for  the 
creditors  of  the  nation.  The  payment  of  the 
dividends  for  the  Government  is,  therefore,  in 
great  part  a  transfer  from  the  account  of  the  Gov- 
ernment to  the  accounts  of  the  various  bankers. 
A  certain  amount  no  doubt  goes  almost  at  once 
to  the  non-banking  classes  ;  to  those  who  keep 
coin  and  notes  in  house,  and  have  no  account  at 
any  bank.  But  even  this  amount  is  calculable, 
for  it  is  always  nearly  the  same.  And  the  entire 
operation  is,  to  those  who  can  watch  it,  singularly 
invariable  time  after  time. 

But  it  is  important  to  observe,  that  the  published 
accounts  of  the  Bank  give  no  such  information  to 
the  public  as  will  enable  them  to  make  their  own 
calculations.  The  account  of  which  we  have  been 
speaking  is  the  yearly  account  of  the  English 


THE  AMOUNT  OF   THE  BANK'S  RESERVE.       305 

Government — what  we  may  call  the  Budget 
account,  that  of  revenue  and  expenditure.  And 
the  laws  of  this  are,  as  we  have  shown,  already 
known.  But  under  the  head  '  Public  Deposits '  in 
the  accounts:  of  the  Bank,  are  contained  also  other 
accounts,  and  particularly  that  of  the  Secretary  for 
India  in  Council,  the  laws  of  which  must  be 
different  and  are  quite  unknown.  The  Secretary 
for  India  is  a  large  lender  on  its  account.  If  any 
one  proposed  to  give  such  power  to  the 
Chancellor  of  the  Exchequer,  there  would  be  great 
fear  and  outcry.  But  so  much  depends  on  habit 
and  tradition,  that  the  India  Office  on  one  side  of 
Downing  Street  can  do  without  remark,  and  with 
universal  assent,  what  it  would  be  thought 
'  unsound '  and  extravagant  to  propose  that  the 
other  side  should  do.  The  present  India  Office 
inherits  this  independence  from  the  old  Board  o:' 
the  Company,  which,  being  mercantile  and  busi- 
ness-like, used  to  lend  its  own  money  on  the 
Stock  Exchange  as  it  pleased  ;  the  Council  ol 
India,  its  successor,  retains  the  power.  Nothing 
can  be  better  than  that  it  should  be  allowed 
to  do  as  it  likes  ;  but  the  mixing  up  the  account 
of  a  body  which  has  such  a  power,  and  which 
draws  money  from  India,  with  that  of  the  Home 
government  clearly  prevents  the  general  public 


300  THE   PRINCIPLES    WHICH  SHOULD  REGULATE 

from  being  able  to  draw  inferences  as  to  the 
course  of  the  combined  account  from  its  knowledge 
of  home  finance  only.  The  account  of  '  public 
deposits '  in  the  Bank  return  includes  other 
accounts  too,  as  the  Savings'  Bank  balance,  the 
Chancery  Funds  account,  and  others ;  and  in 
consequence,  till  lately  the  public  had  but  little 
knowledge  of  the  real  changes  of  the  account  of 
our  Government,  properly  so  called.  But  Mr, 
Lowe  has  lately  given  us  a  weekly  account,  and 
from  this,  and  not  from  the  Bank  account,  we  are 
able  to  form  a  judgment.  This  account  and  the 
return  of  the  Bank  of  England,  it  is  true,  un- 
happily appear  on  different  days  ;  but  except  for 
that  accident  our  knowledge  would  be  perfect  • 
and  as  it  is,  for  almost  all  purposes  what  we  know 
is  reasonably  sufficient.  We  can  now  calculate 
the  course  of  the  Government  account  nearly  as 
well  as  it  is  possible  to  calculate  it. 

So  far,  as  we  have  said,  an  analysis  of  the  return 
of  the  Bank  of  England  is  very  favourable  to  the 
Bank.  So  great  a  reserve  need  not  usually  be 
kept  against  the  Government  account  as  if  it  were 
a  common  account.  We  know  the  laws  oi 
its  changes  peculiarly  well :  we  can  tell  when  its 
principal  changes  will  happen  with  great  accuracy ; 
and  we  know  that  at  such  changes  most  of  what 


THE  AMOUNT  OF   THE  BANICS  RESERVE.       30? 

is  paid  away  by  the  Government  is  only  paid  to 
other  depositors  at  the  Bank,  and  that  it  will 
really  stay  at  the  Bank,  though  under  another 
name.  If  we  look  to  the  private  deposits  of  the 
Bank  of  England,  at  first  sight  we  may  think  that 
the  result  is  the  same.  By  far  the  most  important 
of  these  are  the  '  Bankers'  deposits'  ;  and,  for  the 
most  part,  these  deposits  as  a  whole  are  likely  to 
vary  very  little.  Each  banker,  we  will  suppose, 
keeps  as  little  as  he  can,  but  in  all  domestic  trans- 
actions payment  from  one  is  really  payment  to  the 
other.  All  the  most  important  transactions  in 
the  country  are  settled  by  cheques  ;  these  cheques 
are  paid  in  to  the  '  clearing-house/  and  the 
balances  resulting  from  them  are  settled  by 
transfers  from  the  account  of  one  banker  to  another 
at  the  Bank  of  England.  Payments  out  of  the 
bankers'  balances,  therefore,  correspond  with 
payments  in.  As  a  whole,  the  deposit  of  the 
bankers'  balances  at  the  Bank  of  England  would 
at  first  sight  seem  to  be  a  deposit  singularly 
stable. 

Indeed,  they  would  seem,  so  to  say,  to  be 
better  than  stable.  They  augment  when  every- 
thing else  tends  to  diminish.  At  a  panic,  when 
all  other  deposits  are  likely  to  be  taken  away,  the 
bankers'  deposits,  augment ;  in  fact  they  did  so 


308  THE  PRINCIPLES    WHICH  SHOULD  REGULATR 

in  1866,  though  we  do  not  know  the  particulars,1 
and  it  is  natural  that  they  should  so  increase, 
At  such  moments  all  bankers  are  extremely  anxious, 
and  they  try  to  strengthen  themselves  by  every 
means  in  their  power ;  they  try  to  have  as  much 
money  as  it  is  possible  at  command  ;  they  augment 
their  reserve  as  much  as  they  can,  and  they  place 
that  reserve  at  the  Bank  of  England.  A  deposit 
which  is  not  likely  to  vary  in  ordinary  times,  and 
which  is  likely  to  augment  in  times  of  danger, 
seems,  in  some  sort,  the  model  of  a  deposit.  It 
might  seem  not  only  that  a  large  proportion  of  it 
might  be  lent,  but  that  the  whole  of  it  might  be  so. 
But  a  further  analysis  will,  as  I  believe,  show  that 
this  conclusion  is  entirely  false  ;  that  the  bankers' 
deposits  are  a  singularly  treacherous  form  of 
liability ;  that  the  utmost  caution  ought  to  be  used 
in  dealing  with  them  ;  that,  as  a  rule,  a  less  propor- 
tion of  them  ought  to  be  lent  than  of  ordinary 
deposits. 

The  easiest  mode  of  explaining  anything  is, 
usually,  to  exemplify  it  by  a  single  actual  case. 
And  in  this  subject,  fortunately,  there  is  a  most 
conspicuous  case  near  at  hand.  The  German 
Government  has  lately  taken  large  sums  in  bullion 
trom  this  country,  in  part  from  the  Bank  ol 
England,  and  in  part  not,  according  as  it  chose. 


THE   AMOUNT  OF   THE  BANK'S  RESERVE.      309 

It  was  in  the  main  well  advised,  and  considerate 
in  its  action ;  and  did  not  take  nearly  as  much 
from  the  Bank  as  it  might,  or  as  would  have 
been  dangerous.  Still  it  took  large  sums  from 
the  Bank ;  and  it  might  easily  have  taken  more. 
How  then  did  the  German  Government  obtain 
this  vast  power  over  the  Bank  ?  The  answer  is, 
that  it  obtained  it  by  means  of  the  bankers' 
balances,  and  that  it  did  so  in  two  ways. 

First,  the  German  Government  had  a  large 
balance  of  its  own  lying  at  a  particular  Joint  Stock 
Bank.  That  bank  lent  this  balance  at  its  own 
discretion,  to  bill-brokers  or  others,  and  it  formed 
a  single  item  in  the  general  funds  of  the  London 
market.  There  was  nothing  special  about  it,  ex- 
cept that  it  belonged  to  a  foreign  government,  and 
that  its  owner  was  always  likely  to  call  it  in,  and 
sometimes  did  so.  As  long  as  it  stayed  unlent  in 
the  London  Joint  Stock  Bank,  it  increased  the 
balances  of  that  bank  at  the  Bank  of  England ; 
but  so  soon  as  it  was  lent,  say,  to  a  bill-broker,  it 
increased  the  bill-broker's  balance;  and  as  soon  as 
it  was  employed  by  the  bill-broker  in  the  discount 
of  bills,  the  owners  of  those  bills  paid  it  to  their 
credit  at  their  separate  banks,  and  it  augmented  the 
balances  of  those  bankers  at  the  Bank  of  England. 
Of  course  if  it  were  employed  in  the  discount  of 


510 


THE  PRINCIPLES    WHICH  SHOULD  REGULATE 


bills  belonging  to  foreigners,  the  money  might  bo. 
taken  abroad,  and  by  similar  operations  it  might 
also  be  transferred  to  the  English  provinces  or  to 
Scotland.  But,  as  a  rule,  such  money  when  de 
posited  in  London,  for  a  considerable  time  remain? 
in  London  ;  and  so  long  as  it  does  so,  it  swells  the 
aggregate  balances  of  the  body  of  bankers  at  the 
Bank  of  England.  It  is  now  in  the  balance  of 
one  bank,  now  of  another,  but  it  is  always  dis- 
persed about  those  balances  somewhere.  The 
evident  consequence  is  that  this  part  of  the 
bankers'  balances  is  at  the  mercy  of  the  German 
Government  when  it  chooses  to  apply  for  it. 
Supposing,  then,  the  sum  to  be  three  or  four 
millions — and  I  believe  that  on  more  than  one 
occasion  in  the  last  year  or  two  it  has  been  quite 
as  much,  if  not  more — that  sum  might  at  once  be 
withdrawn  from  the  Bank  of  England.  In  this 
case  the  Bank  of  England  is  in  the  position  of 
;i  banker  who  is  liable  for  a  large  amount  to  a 
single  customer,  but  with  this  addition,  that  it  is 
liable  for  an  unknown  amount.  The  German 
Government,  as  is  well  known,  keeps  its  account 
(and  a  very  valuable  one  it  must  be)  at  the 
London  Joint  Stock  Bank ;  but  the  Bank  of 
England  has  no  access  to  the  account  of  the 
German  Government  at  that  bank  ;  they  cannot 


THE   AMOUNT  OF   THE  BANK'S  RESERVE.       311 

tell  how  much  German  money  is  lying  to  the 
credit  there.  Nor  can  the  Bank  of  England 
infer  much  from  the  balance  of  the  London 
Joint  Stock  Bank  in  their  Bank,  for  the  German 
money  was  probably  paid  in  various  sums  to  that 
bank,  and  lent  out  again  in  other  various  sums. 
It  might  to  some  extent  augment  that  bank's 
balance  at  the  Bank  of  England,  or  it  might  not, 
but  it  certainly  would  not  be  so  much  added  to 
that  balance;  and  inspection  of  that  bank's 
balance  would  not  enable  the  Bank  of  England 
to  determine  even  in  the  vaguest  manner  what  the 
entire  sum  was  for  which  it  might  be  asked  at 
any  moment.  Nor  would  the  inspection  of  the 
bankers'  balances  as  a  whole  lead  to  any  certain 
and  sure  conclusions.  Something  might  be  inferred 
from  them,  but  not  anything  certain.  Those 
balances  are  no  doubt  in  a  state  of  constant 
fluctuation  ;  and  very  possibly  during  the  time  that 
the  German  money  was  coming  in  some  other 
might  be  going  out.  Any  sudden  increase  in  the 
bankers'  balances  would  be  a  probable  indication 
of  new  foreign  money,  but  new  foreign  money 
might  come  in  without  causing  an  increase,  since 
some  other  and  contemporaneous  cause  might 
effect  a  counteracting  decrease. 

This  is  the  first,  and  the  plainest  way  in  which 


312 


THE  PRINCIPLES    WHICH  SHOULD  REGULATE 


the  German  Government  could  take,  and  did  take, 
money  from  this  country  ;  and  in  which  it  might 
have  broken  the  Bank  of  England  if  it  had  liked. 
The  German  Government  had  money  here  and 
took  it  away,  which  is  very  easy  to  understand. 
But  the  Government  also  possessed  a  far  greater 
power,  of  a  somewhat  more  complex  kind.  It 
was  the  owner  of  many  debts  from  England.  A 
large  part  of  the  '  indemnity '  was  paid  by  France 
to  Germany  in  bills  on  England,  and  the  German 
Government,  as  those  bills  became  due,  acquired  an 
unprecedented  command  over  the  market.  As  each 
bill  arrived  at  maturity,  the  German  Government 
could,  if  it  chose,  take  the  proceeds  abroad  ;  and  it 
could  do  so  in  bullion,  as  for  coinage  purposes  it 
wanted  bullion.  This  would  at  first  naturally  cause 
a  reduction  in  the  bankers'  balances  ;  at  least  that 
would  be  its  tendency.  Supposing  the  German  Go- 
vernment to  hold  bill  A,  a  good  bill,  the  banker 
at  whose  bank  bill  A  was  payable  would  have  to 
pay  it ;  and  that  would  reduce  his  balance  ;  and  as 
the  sum  so  paid  would  go  to  Germany,  it  would 
not  appear  to  the  credit  of  any  other  banker :  the 
aggregate  of  the  bankers'  balances  would  thus  be 
reduced.  But  this  reduction  would  not  be  perma- 
nent. A  banker  who  has  to  pay  ioo,ooo/.  cannot 
afford  to  reduce  his  balance  at  the  Bank  ol 


THE  AMOUNT  OF   THE  BANK'S  RESERVE.       31  j 

England  ioo,ooo/.  ;  suppose  that  his  liabilities 
are  2,ooo,ooo/.,  and  that  as  a  rule  he  finds  it 
necessary  to  keep  at  the  Bank  one-tenth  of  these 
liabilities,  or  200, ooo/.,  the  payment  of  ioo,ooo/. 
would  reduce  his  reserve  to  ioo,ooo/.  ;  but  his 
liabilities  would  be  still  i,9OO,ooo/.,  and  therefore 
to  keep  up  his  tenth  he  would  have  9O,ooo/.  to  find. 
His  process  for  finding  it  is  this :  he  calls  in,  say,  a 
loan  to  the  bill-brokers  ;  and  if  no  equal  additional 
money  is  contemporaneously  carried  to  these 
brokers  (which  in  the  case  of  a  large  withdrawal 
of  foreign  money  is  not  probable),  they  must 
reduce  their  business  and  discount  less.  But  the 
effect  of  this  is  to  throw  additional  business  on 
the  Bank  of  England.  They  hold  the  ultimate 
reserve  of  the  country,  and  they  must  discount  out 
of  it  if  no  one  else  will :  if  they  declined  to  do  so 
there  would  be  panic  and  collapse.  As  soon, 
therefore,  as  the  withdrawal  of  the  German  money 
reduces  the  bankers'  balances,  there  is  a  new 
demand  on  the  Bank  for  fresh  discounts  to  make 
up  those  balances.  The  drain  on  the  Bank  is  two- 
fold :  first,  the  banking  reserve  is  reduced  by  ex- 
portation of  the  German  money,  which  reduces 
the  means  of  the  Bank  of  England  ;  and  then  out 
of  those  reduced  means  the  Bank  of  England  has 
to  make  greater  advances. 
14 


PRINCIPLES    WHICH  SHOULD  REGULATE 

The  same  result  may  be  arrived  at  more 
easily.  Supposing  any  foreign  Government  or 
person  to  have  any  sort  of  securities  which  he  can 
pledge  in  the  market,  that  operation  gives  it, 
or  him,  a  credit  on  some  banker,  and  enables  it, 
or  him,  to  take  money  from  the  banking  reserve 
at  the  Bank  of  England,  and  from  the  bankers* 
balances  ;  and  to  replace  the  bankers'  balances  at 
their  inevitable  minimum,  the  Bank  of  England 
must  lend.  Every  sudden  demand  on  the  country 
causes,  in  proportion  to  its  magnitude,  this 
peculiar  effect.  And  this  is  the  reason  why  the 
Bank  of  England  ought,  I  think,  to  deal  most  cau- 
tiously and  delicately  with  their  banking  deposits. 
They  are  the  symbol  of  an  indefinite  liability  :  by 
means  of  them,  as  we  see,  an  amount  of  money  so 
great  that  it  is  impossible  to  assign  a  limit  to  it 
might  be  abstracted  from  the  Bank  of  England. 
As  the  Bank  of  England  lends  money  to  keep  up 
the  bankers'  balances,  at  their  usual  amount,  and 
as  by  means  of  that  usual  amount  whatever  sum 
foreigners  can  get  credit  for  may  be  taken  from 
us,  it  is  not  possible  to  assign  a  superior  limit  (to 
use  the  scientific  word)  to  the  demands  which  by 
means  of  the  bankers'  balances  may  be  made  upon 
the  Bank  of  England. 

The  result  comes  round  to  the  simple  point,  on 


THE  AMOUNT  OF   THE  BANK'S  RESERVE.       31$ 

which  this  book  is  a  commentary :  the  Bank  o* 
England,  by  the  effect  of  a  long  history,  holds  the 
ultimate  cash  reserve  of  the  country;  whatever 
cash  the  country  has  to  pay  comes  out  of  that 
reserve,  and  therefore  the  Bank  of  England  has  to 
pay  it.  And  it  is  as  the  Bankers'  Bank  that  the 
Bank  of  England  has  to  pay  it,  for  it  is  by  being  so 
that  it  becomes  the  keeper  of  the  final  cash  reserve. 
Some  persons  have  been  so  much  impressed 
with  such  considerations  as  these,  that  they  have 
contended  that  the  Bank  of  England  ought  never  to 
lend  the  '  bankers'  balances '  at  all,  that  they  ought 
to  keep  them  intact,  and  as  an  unused  deposit.  I 
am  not  sure,  indeed,  that  I  have  seen  that  extreme 
form  of  the  opinion  in  print,  but  I  have  often 
heard  it  in  Lombard  Street,  from  persons  very 
influential  and  very  qualified  to  judge ;  even  in 
print  I  have  seen  close  approximations  to  it.  But 
I  am  satisfied  that  the  laying  down  such  a  '  hard 
and  fast '  rule  would  be  very  dangerous ;  in  very 
important  and  very  changeable  business  rigid  rules 
are  apt  to  be  often  dangerous.  In  a  panic,  as  has 
been  said,  the  bankers'  balances  greatly  augment.  It 
is  true  the  Bank  of  England  has  to  lend  the  money 
by  which  they  are  filled.  The  banker  calls  in  his 
money  from  the  bill-broker,  ceases  to  re-discount 
for  that  broker,  or  borrows  on  securities,  or  sells 


316  THE  PRINCIPLES   WHICH  SHOULD  REGULATE 

securities ;  and  in  one  or  other  of  these  ways  he 
causes  a  new  demand  for  money  which  can  only 
at  such  times  be  met  from  the  Bank  of  EngLmd. 
Every  one  else  is  in  want  too.  But  without  in- 
quiring into  the  origin  of  the  increase  at  panics,  the 
amount  of  the  bankers'  deposits  in  fact  increases 
very  rapidly ;  an  immense  amount  of  unused  money 
is  at  such  moments  often  poured  by  them  into  the 
Bank  of  England.  And  nothing  can  more  surely 
aggravate  the  panic  than  to  forbid  the  Bank  of 
England  to  lend  that  money.  Just  when  money  is 
most  scarce  you  happen  to  have  an  unusually  large 
fund  of  this  particular  species  of  money,  and  you 
should  lend  it  as  fast  as  you  can  at  such  moments, 
for  it  is  ready  lending  which  cures  panics,  and 
non-lending  or  niggardly  lending  which  aggravates 
them. 

At  other  times,  particularly  at  the  quarterly 
payment  of  the  dividends,  an  absolute  rule  which 
laid  down  that  the  bankers'  balances  were  never 
to  be  lent,  would  be  productive  of  great  inconveni- 
ence. A  large  sum  is  just  then  paid  from  the 
Government  balance  to  the  bankers'  balances,  and 
if  you  permitted  the  Bank  to  lend  it  while  it  \vas 
still  in  the  hands  of  the  Government,  but  forbad 
them  to  lend  it  when  it  came  into  the  hands  of  the 
bankers,  a  great  tilt  upwards  in  the  value  of  money 


THE  AMOUNT  OF   THE  BANK'S  RESERVE.       31* 

would  be  the  consequence,  for  a  most  important 
amount  of  it  would  suddenly  have  become  ineffec- 
tive. 

But  the  idea  that  the  bankers'  balances  ought 
never  to  be  lent  is  only  a  natural  aggravation  ol 
the  truth  that  these  balances  ought  to  be  used 
with  extreme  caution  ;  that  as  they  entail  a  liability 
peculiarly  great  and  singularly  difficult  to  foresee, 
they  ought  never  to  be  used  like  a  common 
deposit. 

It  follows  from  what  has  been  said  that  there 
are  always  possible  and  very  heavy  demands  on 
the  Bank  of  England  which  are  not  shown  in  the 
account  of  the  Banking  department  at  all :  these 
demands  may  be  greatest  when  the  liabilities  shown 
by  that  account  are  smallest,  and  lowest  when 
those  liabilities  are  largest.  If,  for  example,  the 
German  Government  brings  bills  or  other  good 
securities  to  this  market,  obtains  money  with  them, 
and  removes  that  money  from  the  market  in  bullion, 
that  money  may,  if  the  German  Government 
choose,  be  taken  wholly  from  the  Bank  of  England 
If  the  wants  of  the  German  Government  be  urgent, 
and  if  the  amount  of  gold  '"arrivals/  that  is,  the 
gold  coming  here  from  the  mining  countries,  be 
but  small,  that  gold  will  be  taken  from  the  Bank 
of  England,  for  there  is  no  other  large  store  in  the 


THE  PRINCIPLES    WHICH  SHOULD  REGULATE 

country.  The  German  Government  is  only  a  con- 
spicuous example  of  a  foreign  power  which  happens 
lately  to  have  had  an  unusual  command  of  good 
securities,  and  an  unusually  continuous  wish  to 
use  them  in  England.  Any  foreign  state  here- 
after which  wants  cash  will  be  likely  to  come  here 
for  it;  so  long  as  the  Bank  of  France  should  con- 
tinue not  to  pay  in  specie,  a  foreign  state  which 
wants  it  must  of  necessity  come  to  London  for  it. 
And  no  indication  of  the  likelihood  or  unlikelihood 
of  that  want  can  be  found  in  the  books  of  the 
Bank  of  England. 

What  is  almost  a  revolution  in  the  policy  of  the 
Bank  of  England  necessarily  follows  :  no  certain 
or  fixed  proportion  of  its  liabilities  can  in  the 
present  times  be  laid  down  as  that  which  the  Bank 
ought  to  keep  in  reserve.  The  old  notion  that 
one-third,  or  any  other  such  fraction,  is  in  all 
cases  enough,  must  be  abandoned.  The  probable 
demands  upon  the  Bank  are  so  various  in  amount, 
and  so  little  disclosed  by  the  figures  of  the  ac- 
count, that  no  simple  and  easy  calculation  is  a 
sufficient  guide.  A  definite  proportion  of  the 
liabilities  might  often  be  too  small  for  the  reserve, 
and  sometimes  too  great.  The  forces  of  the 
enemy  being  variable,  those  of  the  defence  cannot 
always  be  the  same. 


THE  AMOUNT  OF    THE  BANK* S  RESERVE.       319 

I  admit  that  this  conclusion  is  very  inconvenient. 
In  past  times  it  has  been  a  great  aid  to  the  Bank 
and  to  the  public  to  be  able  to  decide  on  the 
proper  policy  of  the  Bank  from  a  mere  inspection 
of  its  account.  In  that  way  the  Bank  knew  easily 
what  to  do  and  the  public  knew  easily  what  to  fore- 
see. But,  unhappily,  the  rule  which  is  most  simple 
is  not  always  the  rule  which  is  most  to  be  relied 
upon.  The  practical  difficulties  of  life  often 
cannot  be  met  by  very  simple  rules  ;  those  dangers 
being  complex  and  many,  the  rules  for  encoun- 
tering them  cannot  well  be  single  or  simple.  A 
uniform  remedy  for  many  diseases  often  ends  by 
killing  the  patient. 

Another  simple  rule  often  laid  down  for  the 
management  of  the  Bank  of  England  must  now 
be  abandoned  also.  It  has  been  said  that  the  Bank 
of  England  should  look  to  the  market  rate,  and 
make  its  own  rate  conform  to  that.  This  rule 
was,  indeed,  always  erroneous.  The  first  duty  of 
the  Bank  of  England  was  to  protect  the  ultimate 
cash  of  the  country,  and  to  raise  the  rate  of  interest 
so  as  to  protect  it.  But  this  rule  was  never  so 
erroneous  as  now,  because  the  number  of  sudden 
demands  upon  that  reserve  was  never  formerly 
so  great.  The  market  rate  of  Lombard  Street  is 
not  influenced  by  those  demands.  That  rate  is 


320  THE  PRINCIPLES    WHICH  SHOULD  REGULATE 

determined  by  the  amount  of  deposits  in  the 
hands  of  bill-brokers  and  bankers,  and  the  amount 
of  good  bills  and  acceptable  securities  offered  at  the 
moment.  The  probable  efflux  of  bullion  from 
the  Bank  scarcely  affects  it  at  all;  even  the  real 
efflux  affects  it  but  little ;  if  the  open  market  did 
not  believe  that  the  Bank  rate  would  be  altered 
in  consequence  of  such  effluxes  the  market  rate 
would  not  rise.  If  the  Bank  choose  to  let  its 
bullion  go  unheeded,  and  is  seen  to  be  going  so 
to  choose,  the  value  of  money  in  Lombard  Street 
will  remain  unaltered.  The  more  numerous  the 
demands  on  the  Bank  for  bullion,  and  the  more 
variable  their  magnitude,  the  more  dangerous  is 
the  rule  that  the  Bank  rate  of  discount  should 
conform  to  the  market  rate.  In  former  quiet 
times  the  influence,  or  the  partial  influence,  of 
that  rule  has  often  produced  grave  disasters.  In 
the  present  difficult  times  an  adherence  to  it  is  a 
recipe  for  making  a  large  number  of  panics. 

A  more  distinct  view  of  abstract  principle  must 
be  taken  before  we  can  fix  on  the  amount  of  the 
reserve  which  the  Bank  of  England  outfit  to 

o  o 

keep.  Why  should  a  bank  keep  any  reserve  ? 
Because  it  may  be  called  on  to  pay  certain 
liabilities  at  once  and  in  a  moment.  Why  does 
any  bank  publish  an  account  ?  In  order  to 


THE  AMOUNT  OF   THE  BANK'S  RESERVE.      321 

satisfy  the  public  that  it  possesses  cash — or  avail- 
able  securities — enough  to  meet  its  liabilities 
The  object  of  publishing  the  account  of  the  banking 
department  of  the  Bank  of  England  is  to  let  the 
nation  see  how  the  national  reserve  of  cash  stands, 
to  assure  the  public  that  there  is  enough  and  more 
than  enough  to  meet  not  only  all  probable  calls, 
but  all  calls  of  which  there  can  be  a  chance  of 
reasonable  apprehension.  And  there  is  no  doubt 
that  the  publication  of  the  Bank  account  gives 
more  stability  to  the  money  market  than  any 
other  kind  of  precaution  would  give.  Some 
persons,  indeed,  feared  that  the  opposite  result 
would  happen  ;  they  feared  that  the  constant 
publication  of  the  incessant  changes  in  the  reserve 
would  terrify  and  harass  the  public  mindf  An 
old  banker  once  told  me :  '  Sir,  I  was  on  Lord 
Althorp's  committee  which  decided  on  the  publi- 
cation of  the  Bank  account,  and  I  voted  against 
it.  I  thought  it  would  frighten  people.  But  I 
am  bound  to  own  that  the  committee  was  right 
and  I  was  wrong,  for  that  publication  has  given 
the  money  market  a  greater  sense  of  security  than 
anything  else  which  has  happened  in  my  time.' 
The  diffusion  of  confidence  through  Lombard 
Street  and  the  world  is  the  object  of  the  publi* 

14* 


^22  THE  PRINCIPLES    WHICH  SHOULD  REGULATE 

cation  of  the    Bank   accounts   and  of  the  Bank 
reserve. 

But  that  object  is  not  attained  if  the  amount  of 
that  reserve  when  so  published  is  not  enough  to 
tranquillise  people.  A  panic  is  sure  to  be  caused 
if  that  reserve  is,  from  whatever  cause,  exceedingly 
low.  At  every  moment  there  is  a  certain  mini- 
mum which  I  will  call  the  '  apprehension  mini- 
mum/ below  which  the  reserve  cannot  fall  without 
great  risk  of  diffused  fear  ;  and  by  this  I  do  not 
mean  absolute  panic,  but  only  a  vague  fright  and 
timorousness  which  spreads  itself  instantly,  and 
as  if  by  magic,  over  the  public  mind.  Such 
seasons  of  incipient  alarm  are  exceedingly 
dangerous,  because  they  beget  the  calamities  they 
dread.  What  is  most  feared  at  such  moments  of 
susceptibility  is  the  destruction  of  credit ;  and  if 
any  grave  failure  or  bad  event  happens  at  such 
moments,  the  public  fancy  seizes  on  it,  there  is  a 
general  run,  and  credit  is  suspended.  The  Bank 
reserve  then  never  ought  to  be  diminished  below 
the  '  apprehension  point.'  And  this  is  as  much  as 
to  say,  that  it  never  ought  very  closely. to  approach 
that  point;  since,  if  it  gets  very  near,  some  accident 
may  easily  bring  it  down  to  that  point  and  cause 
the  evil  that  is  feared. 

There  is  no  '  royal  road '  to  the  amount  of  the 


THE  AMOUNT  OF   THE  BANK'S  RESERVE.      323 

'  apprehension  minimum  ' :  no  abstract  argument; 
and  no  mathematical  computation  will  teach  it  ta 
us.  And  we  cannot  expect  that  they  should. 
Credit  is  an  opinion  generated  by  circumstances 
and  varying  with  those  circumstances.  The  state 
of  credit  at  any  particular  time  is  a  matter  of  fact 
only  to  be  ascertained  like  other  matters  of  fact  ; 
it  can  only  be  known  by  trial  and  inquiry.  And 
in  the  same  way,  nothing  but  experience  can  tell 
us  what  amount  of  '  reserve'  will  create  a  diffused 
confidence ;  on  such  a  subject  there  is  no  way  of 
arriving  at  a  just  conclusion  except  by  incessantly 
watching  the  public  mind,  and  seeing  at  each 
juncture  how  it  is  affected. 

Of  course  in  such  a  matter  the  cardinal  rule  to 
be  observed  is,  that  errors  of  excess  are  innocuous 
but  errors  of  defect  are  destructive.  Too  much 
reserve  only  means  a  small  loss  of  profit,  but  too 
small  a  reserve  may  mean  '  ruin.'  Credit  may  be  at 
once  shaken,  and  if  some  terrifying  accident  happen 
to  supervene,  there  may  be  a  run  on  the  Banking 
department  that  may  be  too  much  for  it,  as  in  1857 
and  1866,  and  may  make  it  unable  to  pay  its  way 
without  assistance — as  it  was  in  those  years. 

And,  the  observance  of  this  maxim  is  the  more 
necessary  because  the  '  apprehension  minimum '  is 
not  always  the  same.  On  thf  contrary,  in  times 


324 


THE  PRINCIPLES   WHICH  SHOULD  REGULATE 


when  the  public  has  recently  seen  the  Bank  oJ 
England  exposed  to  remarkable  demands,  it  is 
likely  to  expect  that  such  demands  may  come  again. 
Conspicuous  and  recent  events  educate  it,  so  to 
speak  ;  it  expects  that  much  will  be  demanded 
when  much  has  of  late  often  been  demanded,  and 
that  little  will  be  so,  when  in  general  but  little  has 
been  so.  A  bank  like  the  Bank  of  England  must 
always,  therefore,  be  on  the  watch  for  a  rise,  if  I 
may  so  express  it,  in  the  apprehension  minimum  ; 
it  must  provide  an  adequate  fund  not  only  to  allay 
the  misgivings  of  to-day,  but  also  to  allay  what 
may  be  the  still  greater  misgivings  of  to-morrow. 
And  the  only  practical  mode  of  obtaining  this  object 
is  to  keep  the  actual  reserve  always  in  advance  of 
the  minimum  '  apprehension  '  reserve. 

And  this  involves  something  much  more.  As 
the  actual  reserve  is  never  to  be  less,  and  is  always, 
if  possible,  to  exceed  by  a  reasonable  amount  the 
'  minimum '  apprehension  reserve,  it  must  when  the 
Bank  is  quiet  and  taking  no  precautions  very  con- 
siderably exceed  that  minimum.  All  the  precau- 
tions of  the  Bank  take  time  to  operate.  The 
principal  precaution  is  a  rise  in  the  rate  of  discount, 
and  such  a  rise  certainly  does  attract  money  from 
the  Continent  and  from  all  the  world  much  faster 
than  could  have  been  anticipated.  But  it  does  not 


THE  AMOUNT  OF  THE  BANK^S  RESERVE.      325 

act  instantaneously  ;  even  the  right  rate,  the  ulti- 
mately attractive  rate,  requires  an  interval  for  its 
action,  and  before  the  money  can  come  here.  And 
the  right  rate  is  often  not  discovered  for  some  time. 
It  requires  several  '  moves/  as  the  phrase  goes, 
several  augmentations  of  the  rate  of  discount  by 
the  Bank,  before  the  really  effectual  rate  is  reached, 
and  in  the  mean  time  bullion  is  ebbing  away  and 
the  '  reserve'  is  diminishing.  Unless,  therefore,  in 
times  without  precaution  the  actual  reserve  exceed 
the  '  apprehension  minimum '  by  at  least  the 
amount  which  may  be  taken  away  in  the  inevitable 
interval,  and  before  the  available  precautions  begin 
to  operate,  the  rule  prescribed  will  be  infringed, 
and  the  actual  reserve  will  be  less  than  the  '  appre- 
hension '  minimum.  In  time  the  precautions  taken 
may  attract  gold  and  raise  the  reserve  to  the 
needful  amount,  but  in  the  interim  the  evils  may 
happen  against  which  the  rule  was  devised, 
diffused  apprehension  may  arise,  and  then  any 
unlucky  accident  may  cause  many  calamities. 

I  may  be  asked,  '  What  does  all  this  reasoning 
in  practice  come  to  ?  At  the  present  moment  how 
much  reserve  do  you  say  the  Bank  of  England 
should  keep  ?  state  your  recommendation  clearly  (I 
know  it  will  be  said)  if  you  wish  to  have  it  attended 
to.'  And  I  will  answer  the  question  plainly,  though 


326  77/.E  PRINCIPLES    WHICH  SHOULD  REGULAT?. 

in  so  doing  tliere  is  a  great  risk  that  the  principles 
I  advocate  may  be  in  some  degree  injured  through 
some  mistake  I  may  make  in  applying  them. 

I  should  say  that  at  the  present  time  the  mind 
of  the  monetary  world  would  become  feverish  and 
fearful  if  the  reserve  in  the  Banking  department 
of  the  Bank  of  England  went  below  io,ooo,ooo/. 
Estimated  by  the  idea  of  old  times,  by  the  idea 
even  of  ten  years  ago,  that  sum,  I  know,  sounds 
extremely  large.  My  own  nerves  were  educated 
to  smaller  figures,  because  I  was  trained  in  times 
when  the  demands  on  us  were  less,  when  neither 
was  so  much  reserve  wanted  nor  did  the  public 
expect  so  much.  But  I  judge  from  such  observa- 
tions as  I  can  make  of  the  present  state  of  men's 
minds,  that  in  fact,  and  whether  justifiably  or  not, 
the  important  and  intelligent  part  of  the  pub- 
lic which  watches  the  Bank  reserve  becomes 
anxious  and  dissatisfied  if  that  reserve  falls  below 
io,ooo,ooo/.  That  sum,  therefore,  I  call  the 
'apprehension  minimum' for  the  present  times. 
Circumstances  may  change  and  may  make  it  less 
or  more,  but  according  to  the  most  careful  esti- 
mate I  can  make,  that  is  what  I  should  call  it  now. 

It  will  be  said  that  this  estimate  is  arbitrary  and 
these  figures  are  conjectures.  I  reply  that  I  only 
submit  them  for  the  judgment  of  others.  The 


THE  AMOUNT  OF   THE  BANK'S  RESERVE.      327 

main  question  is  one  of  fact — Does  not  the  public 
mind  begin  to  be  anxious  and  timorous  just  where 
I  have  placed  the  apprehension  point  ?  and  the 
deductions  from  that  are  comparatively  simple 
questions  of  mixed  fact  and  reasoning.  The 
final  appeal  in  such  cases  necessarily  is  to  those 
who  are  conversant  with  and  who  closely  watch 
the  facts. 

I  shall  perhaps  be  told  also  that  a  body  like  the 
Court  of  the  Directors  of  the  Bank  of  England 
cannot  act  on  estimates  like  these :  that  such  a 
body  must  have  a  plain  rule  and  keep  to  it.  I  say 
in  reply,  that  if  the  correct  framing  of  such  esti- 
mates is  necessary  for  the  good  guidance  of  the 
Bank,  we  must  make  a  governing  body  which  can 
correctly  frame  such  estimates.  We  must  not 
suffer  from  a  dangerous  policy  because  we  have 
inherited  an  imperfect  form  of  administration.  I 
have  before  explained  in  what  manner  the  govern- 
ment of  the  Bank  of  England  should,  I  consider, 
be  strengthened,  and  that  government  so  strength- 
ened would,  I  believe,  be  altogether  competent  to 
a  wise  policy. 

Then  I  should  say,  putting  the  foregoing  rea- 
soning into  figures,  that  the  Bank  ought  never  to 
keep  less  than  n,ooo,ooo/.  or  i  i,5OO,ooo/.,  sinc< 
experience  shows  that  a  million,  or  a  million  an< 


32! 


THE  AMOUNT  OF   THE  BANK'S   RESERVE. 


a  half,  may  be  taken  from  us  at  any  time.  I 
should  regard  this  as  the  practical  minimum  at 
which,  roughly  of  course,  the  Bank  should  aim, 
and  which  it  should  try  never  to  be  below.  And, 
in  order  not  to  be  below  1 1, 500,000^,  the  Bank 
must  begin  to  take  precautions  when  the  reserve 
is  between  14,000,0007.  and  I5,ooo,ooo/.  ;  for  ex- 
perience shows  that  between  2,ooo,ooo/.  and 
3,ooo,ooo/.  may,  probably  enough,  be  withdrawn 
from  the  Bank  store  before  the  right  rate  of 
interest  is  found  which  will  attract  money  from 
abroad,  and  before  that  rate  has  had  time  to 
attract  it.  When  the  reserve  is  between 
i4,ooo,ooo/.  and  i5,ooo,ooo/.,  and  when  it  begins 
to  be  diminished  by  foreign  demand,  the  Bank  of 
England  should,  I  think,  begin  to  act,  and  to  raise 
the  rate  of  interest. 


CHAPTER  XIII. 

CONCLUSION. 

I  KNOW  it  will  be  said  that  in  this  work  I  have 
pointed  out  a  deep  malady,  and  only  suggested  a 
superficial  remedy.  I  have  tediously  insisted  that 
the  natural  system  of  banking  is  that  of  many 
banks  keeping  their  own  cash  reserve,  with  the 
penalty  of  failure  before  them  if  they  neglect  it. 
I  have  shown  that  our  system  is  that  of  a  single 
bank  keeping  the  whole  reserve  under  no  effectual 
penalty  of  failure.  And  yet  I  propose  to  retain 
that  system,  and  only  attempt  to  mend  and  pal- 
liate it. 

I  can  only  reply  that  I  propose  to  retain  this 
system  because  I  am  quite  sure  that  it  is  of  no 
manner  of  use  proposing  to  alter  it.  A  system  of 
credit  which  has  slowly  grown  up  as  years  went 
on,  which  has  suited  itself  to  the  course  of  busi- 
ness, which  has  forced  itself  on  the  habits  of  men, 


33O  CONCLUSION 

will  not  be  altered  because  theorists  disapprove  of 
it,  or  because  books  are  written  against  it.  You 
might  as  well,  or  better,  try  to  alter  the  English 
monarchy  and  substitute  a  republic,  as  to  alter 
the  present  constitution  of  the  English  money 
market,  founded  on  the  Bank  of  England,  and 
substitute  for  it  a  system  in  which  each  bank  shall 
keep  its  own  reserve.  There  is  no  force  to  be 
found  adequate  to  so  vast  a  reconstruction,  and  so 
vast  a  destruction,  and  therefore  it  is  useless  pro- 
posing them. 

No  one  who  has  not  long  considered  the 
subject  can  have  a  notion  how  much  this  depend- 
ence on  the  Bank  of  England  is  fixed  in  our 
national  habits.  I  have  given  so  many  illustrations 
in  this  book  that  I  fear  I  must  have  exhausted  my 
reader's  patience,  but  I  will  risk  giving  another. 
I  suppose  almost  everyone  thinks  that  our  system 
of  savings'  banks  is  sound  and  good.  Almost 
everyone  would  be  surprised  to  hear  that  there  is 
any  possible  objection  to  it.  Yet  see  what  it 
amounts  to.  By  the  last  return  the  savings'  oanks 
—the  old  and  the  Post  Office  together  —contain 
about  6o,ooo,ooo/.  of  deposits,"  and  against  this 
they  hold  in  the  funds  securities  of  the  best  kind. 
But  they  hold  no  cash  whatever.  They  have 
of  course  the  petty  cash  about  the  various 


CONCLUSION. 


331 


branches  necessary  for  daily  work.  But  of  cash 
in  ultimate  reserve — cash  in  reserve  against  a 
panic — the  savings'  banks  have  not  a  sixpence. 
These  banks  depend  on  being  able  in  a  panic  to 
realise  their  securities.  But  it  has  been  shown 
over  and  over  again,  that  in  a  panic  such  securities 
can  only  be  realised  by  the  help  of  the  Bank  ot 
England — that  it  is  only  the  Bank  with  the  ulti- 
mate cash  reserve  which  has  at  such  moments  any 
new  money,  or  any  power  to  lend  and  act.  \i 
in  a  general  panic  there  were  a  run  on  the  savings' 
banks,  those  banks  could  not  sell  ioo,ooo/.  of 
Consols  without  the  help  of  the  Bank  of  England  ; 
not  holding  themselves  a  cash  reserve  for  times 
of  panic,  they  are  entirely  dependent  on  the  one 
Bank  which  does  hold  that  reserve. 

This  is  only  a  single  additional  instance  beyond 
the  innumerable  ones  given,  which  shows  how 
deeply  our  system  of  banking  is  fixed  in  our  ways 
of  thinking.  The  Government  keeps  the  money 
of  the  poor  upon  it,  and  the  nation  fully  approves 
of  their  doing  so.  No  one  hears  a  syllable  of  ob- 
jection. And  every  practical  man — every  man 
who  knows  the  scene  of  action — will  agree  that 
our  system  of  banking,  based  on  a  single  reserve 
in  the  Bank  of  England,  cannot  be  altered, 
or  a  system  of  many  banks,  each  keeping  its 


332 


CONCLUSION. 


own  reserve,  be  substituted  for  it.  Nothing  but 
a  revolution  would  effect  it,  and  there  is  nothing 
to  cause  a  revolution. 

This  being  so,  there  is  nothing  for  it  but  to 
make  the  best  of  our  banking  system,  and  to  work 
it  in  the  best  way  that  it  is  capable  of.  We  can 
only  use  palliatives,  and  the  point  is  to  get  the 
best  palliative  we  can.  I  have  endeavoured  to 
show  why  it  seems  to  me  that  the  palliatives 
which  I  have  suggested  are  the  best  that  are  at 
our  disposal. 

I  have  explained  why  the  French  plan  will  not 
suit  our  English  world.  The  direct  appointment 
of  the  Governor  and  Deputy-Governor  of  the 
Bank  of  England  by  the  executive  Government 
would  not  lessen  our  evils  or  help  our  difficulties. 
I  fear  it  would  rather  make  both  worse.  But 
possibly  it  may  be  suggested  that  I  ought  to  ex- 
plain why  the  American  system,  or  some  modifica- 
tion, would  not  or  might  not  be  suitable  to  us. 
The  American  law  says  that  each  national  bank 
shall  have  a  fixed  proportion  of  cash  to  its 
liabilities  (there  are  two  classes  of  banks,  and  two 
different  proportions ;  but  that  is  not  to  the 
present  purpose),  and  it  ascertains  by  inspec- 
tors, who  inspect  at  their  own  times,  whether  the 
required  amount  of  cash  is.  in  the  bank  or  not 


CONCLUSION. 


333 


It  may  be  asked,  could  nothing  like  this  be 
attempted  in  England  ?  could  not  it,  or  some 
modification,  help  us  out  of  our  difficulties  ?  As 
far  as  the  American  banking  system  is  one  of  many 
reserves,  I  have  said  why  I  think  it  is  of  no  use  con- 
sidering whether  we  should  adopt  it  or  not.  We 
cannot  adopt  it  if  we  would.  The  one-reserve 
system  is  fixed  upon  us.  The  only  practical 
imitation  of  the  American  system  would  be  to 
enact  that  the  Banking  department  of  the  Bank  of 
England  should  always  keep  a  fixed  proportion- 
say  one-third  of  its  liabilities — in  reserve.  But,  as 
we  have  seen  before,  a  fixed  proportion  "of  the 
liabilities,  even  when  that  proportion  is  voluntarily 
chosen  by  the  directors,  and  not  imposed  by  law, 
is  not  the  proper  standard  for  a  bank  reserve. 
Liabilities  may  be  imminent  or  distant,  and  a  fixed 
rule  which  imposes  the  same  reserve  for  both  will 
sometimes  err  by  excess,  and  sometimes  by  defect. 
It  will  waste  profits  by  over-provision  against 
ordinary  danger,  and  yet  it  may  not  always  save 
the  bank  ;  for  this  provision  is  often  likely  enough 
to  be  insufficient  against  rare  and  unusual  dangers 
But  bad  as  is  this  system  when  voluntarily 
chosen,  it  becomes  far  worse  when  legally  and 
compulsorily  imposed.  In  a  sensitive  state  of  the 
English  money  market  the  near  approach  to  the 


334  CONCLUSION. 

legal  limit  of  reserve  would  be  a  sure  incentive  tu 
panic  ;  if  one-third  were  fixed  by  law,  the  moment 
the  banks  were  close  to  one-third,  alarm  would 
begin,  and  would  run  like  magic.  And  the  fear 
would  be  worse  because  it  would  not  be  unfounded 
—at  least,  not  wholly.  If  you  say  that  the  Bank 
shall  always  hold  one-third  of  its  liabilities  as  a 
reserve,  you  say  in  fact  that  this  one-third  shall 
always  be  useless,  for  out  of  it  the  Bank  cannot 
make  advances,  cannot  give  extra  help,  cannot  do 
•what  we  have  seen  the  holders  of  the  ultimate 
'eserve  ought  to  do  and  must  do.  There  is  no 
help  for  us  in  the  American  system ;  its  very 
essence  and  principle  are  faulty. 

We  must  therefore,  I  think,  have  recourse  to 
feeble  and  humble  palliatives  such  as  I  have  sug- 
gested. With  good  sense,  good  judgment,  and 
good  care,  I  have  no  doubt  that  they  may  be 
enough.  But  I  have  written  in  vain  if  I  require 
to  say  now  that  the  problem  is  delicate,  that  the 
solution  is  varying  and  difficult,  and  that  the  result 
is  inestimable  to  us  all. 


APPENDIX. 


NOTE  A. 

'LIABILITIES    AND      CASH     RESERVE      OF     THE    CHIEF 
BANKING  SYSTEMS. 

The  following  is  a  comparison  of  the  liabilities  to  the 
public,  and  of  the  cash  reserve,  of  the  banking  systems 
of  the  United  Kingdom,  France,  Germany,  and  the 
United  States.  For  the  United  Kingdom  the  figures 
are  the  most  defective,  as  they  only  include  the  deposits 
of  the  Bank  of  England,  and  of  the  London  joint  stock 
banks,  and  the  banking  reserve  of  the  Bank  of  England, 
which  is  the  only  cash  available  against  these  liabilities 
is  also  the  only  cash  reserve  against  the  similar  liabili- 
ties of  the  London  private  banks,  the  provincial  English 
banks,  and  the  Scotch  and  Irish  banks.  In  the  case  of 
England,  therefore,  the  method  of  comparison  exhibits 
a  larger  proportion  of  cash  to  liabilities  than  what  really 
exists. 

(i)  ENGLISH  BANKING. 

Liabilities.  £ 

Deposits  of  Bank  of  England,  less  estimated 
Joint  Stock  Bank  balances,  at  December  31, 
1872 29,000,000 

Deposits  of  London  Joint  Stock  Banks  at  De- 
cember 31,  1872  (see  '  Economist,'  February 
8,  1873)  .  91,000,000 

Total  liabilities  .         .         .      120,000,000 


336  APPENDIX. 

Reserve  of  Cash. 
Banking  Reserve  in  Bank  of  England  .     . 


Making  proportion  of  cash  reserve  to  liabilities  to  the  public 
about  1 1  '2  per  cent. 

(2)  BANK  OF  FRANCE  (FEBRUARY,  1873). 

Liabilities.  £ 

Circulation 110,000,000 

Deposits 15,000,000 

Total  liabilities    .        .        .      125,000,000 

Reserve  of  Cash. 
Coin  and  bullion  in  hand  ....        32,000,000 

Making  proportion  of  cash  reserve  to  liabilities  to  the  public 
about  25  per  cent. 

(3)  BANKS  OF  GERMANY  (JANUARY,  1873). 

Liabilities.  £ 

Circulation        .         .         .         .         .         .         .  63,000,000 

Deposits 8,000,000 

Acceptances  and  Indorsements        .        .        .  17,000,000 

Total  liabilities     .        .        .        88.000,000 
Reserve  of  Cash. 


Cash  in  hand     . 

Making  proportion  of  cash  reserve  to  liabilities  to  the  public 
about  47  per  cent. 

4)  NATIONAL  BANKS  OF  UNITED  STATES  (OCTOBER  3,  1872) 

Liabilities*  £ 

Circulation 67,000,000 

Deposits 145,000,000 

Total  liabilities        ,         .      212,000,000 


APPENDIX. 


337 


Reserve  of  Cash. 
Coin  and  legal  tenders  in  hand    . 


Making  proportion  of  cash  reserve  to  liabilities  to  the  public 
about  12*3  per  cent. 

SUMMARY. 


Proportion 

Liabilities  to  the 
public- 

Cash  htld. 

of  cash  to 
liabilities 

per  cent. 

£ 

£ 

Bank  of  England  and  ) 

London  Joint  Stock  > 

120,000,000 

13,500,000 

11*2 

Banks      .         .       .  ) 

Bank  of  France 

125,000,000 

32,000,000 

25-0 

Banks  of  Germany    . 

88,000,000 

4i;ooo,ooo 

47*o 

National     Banks     of  ) 
United  States.         .  \ 

212,000,000 

26,000,000 

I2'3 

NOTE   B. 

EXTRACT  FROM  EVIDENCE  GIVEN  BY  MR.  ALDERMAN 
SALOMONS  BEFORE  HOUSE  OF  COMMONS  SELECT  COM- 
MITTEE IN  1858. 

1146.  Chairman.'}  The  effect  upon  yourselves  of  the 
pressure  in  November  was,  I  presume,  to  inducej^ojl  to 
increase  your  reserve  in  your  own  hands,  and  also  to  in- 
crease your  deposits  with  the  Bank  of  England  ? — Yes, 
that  was  so  ;  but  I  wish  to  tell  the  Committee  that  that 
#as  done  almost  entirely  by  allowing  the  bills  of  exchange 
which  we  held  to  mature,  and  not  by  raising  any  money, 
or  curtailing  our  accommodation  to  our  customers.  Per- 
haps it  may  be  interesting  to  the  Committee  to  know 
15 


338  APPENDIX. 

that  on  the  nth  of  November  we  held  discounted  bills 
for  brokers  to  the  amount  of  5,623,ooo/.  Out  of  those 
bills,  2,8oo,ooo/.  matured  between  the  I  ith  of  November 
and  the  4th  of  December,  and  2,ooo,ooo/.  more  between 
the  4th  of  December  and  the  3ist.  So  that  about 
5,ooo,ooo/.  of  bills  matured  between  the  nth  of  Novem- 
ber and  the  3ist  of  December;  consequently  we  were 
prepared,  merely  by  the  maturing  of  our  bills  of  exchange, 
for  any  demands  that  might  possibly  come  upon  us. 

1 147-  I  understand  you  to  say  that  you  did  not  with- 
draw your  usual  accommodation  from  your  own  cus- 
tomers, but  that  you  ceased  to  have  in  deposit  with  the 
bill-brokers  so  large  a  sum  of  money  as  you  had  before  ? 
— Not  exactly  that ;  the  bills  which  we  had  discounted 
were  allowed  to  mature,  and  we  discounted  less  ;  we 
kept  a  large  reserve  of  cash. 

1 148.  That  is  to  say,  you  withdrew  from  the  commer- 
cial world  a  part  of  that  accommodation  which  you  had 
previously  given,  and  at  the  same  time  you  increased 
your  deposits  with  the  Bank  of  England  ? — Yes,  our  de- 
posits with  the  Bank  of  England  were  increased.     We 
did  not  otherwise  withdraw  accommodation. 

1149.  Mr.   Wegtielin.~\  Had  you  any  money  at  call 
with  the  bill-brokers  ? — A  small  amount  ;  perhaps  about 
500, ooo/.  or  less,  which  we  did  not  call  in. 

1150.  Chairman.]  What  I  understand  you  to  say  is, 
that  the  effect  of  the  commercial  pressure  upon  you  was 
to  induce  you  upon  the  whole  to  withdraw  from  com- 
merce an  amount  of  accommodation  which  in  other  times 
you  had  given,  and  at  the  same  time  to  increase  your 
deposits  with  the  Bank  of  England  ? — So  far  only  as 
ceasing  to  discount  with  strangers,  persons  not  having 
current  accounts  with  us. 


APPENDIX. 


339 


1151  Or  to  give  the  same  amount  to  the  bill-broker  ? 
• — For  a  while,  instead  of  discounting  for  brokers  and 
strangers,  we  allowed  our  bills  to  mature,  and  remained 
quiescent  with  a  view  to  enable  us  to  meet  any  demand 
that  might  be  made  on  ourselves. 

1152.  Except  what  you  felt  bound  to  your  own  cus- 
tomers to  continue  to  give,  you  ceased  to  make  advances  ? 
— Quite  so  ;  perhaps  I  might  say  at  the  same  time,  that 
besides  a  large  balance  which  we  kept  at  the  Bank  of 
England,  which  of  course  was  as  available  as  in  our  own 
tills,  we  increased  our  notes  in  our  tills  at  the  head  office 
and  at  all  the  branches. 

1153.  I  suppose  at  that  time   large   sales   of  public 
securities  were  made  by  the  London  joint  stock  banks, 
which  securities  were  purchased  by  the  public  ? — It  is 
understood  that  some  joint  stock  and  other  banks  sold, 
but  I  believe  it  is  quite  certain  that  the  public  purchased 
largely,  because  they  always  purchase  when  the  funds  fall. 

1154.  Are  you  prepared  to  give  the  Committee  any 
opinion  of  your  own  as  to  the  effect,  one  way  or  the  other, 
which  the  system  of  the  joint  stock  banks  may  have  pro- 
duced with    regard  to  aggravating  or  diminishing  the 
commercial   pressure   in  the  autumn  of  last  year  ? — I 
should  state,  generally,  that  the  joint  stock  banks,  as  well 
as  all  other  banks,  in  London,  by  collecting  money  from 
those   who   had   it   to  spare,  must   of  necessity   have 
assisted,  and  could  not  do  otherwise  than  assist  com- 
merce, both  then  and  at  all  other  times. 

1155.  You  say  that   your  discounts,  either  at   your 
own  counter  or  through  the  bill-brokers,  are  ordinarily 
very  large,  but  that  at  the  time  of  severest  pressure  you 
contracted  them  so  far  as  you  thought  was  just  to  your 
own  immediate  customers  ? — Yes  ;  but  the  capital  was 


340 


APPENDIX. 


still  there,  because  it  was  at  the  Bank  of  England,  and 
;t  was  capable  of  being  used  for  short  periods  ;  if  we  did 
not  want  it,  others  might  have  used  it. 

1156.  Mr.    Weguelin.~\  In   fact,  it  was  used  by  the 
Bank  of  England  ? — Undoubtedly  ;  I  should  suppose  so ; 
there  is  no  question  about  it. 

1157.  You,  of  course,  felt   quite   certain   that  your 
deposits  in  the  Bank  of  England  might  be  had  upon 
demand  ? — We  had  no  doubt  about  it. 

1158.  You  did  not  take  into  consideration  the  effect 
of  the  law  of  1844,  which  might  have  placed  the  Banking 
Department  of  the  Bank  of  England  in  such  a  position 
as  not  to  be  able  to  meet  the  demands  of  its  depositors  ? 
— I    must   say   that   that   never   gave   us   the  smallest 
concern. 

1 1 59.  You  therefore  considered  that,  if  the  time  should 
arrive, the  Government  would  interfere  with  some  measure 
as  they  had  previously  done  to  enable  the  Bank  to  meet 
the  demands  upon  it  ? — We  should  always  have  thought 
that  if  the  Bank  of  England  had  stopped  payment,  all 
the  machinery  of  Government  would  have  stopped  with 
it,  and  we  never  could  have  believed  that  so  formidable 
a  calamity  would  have  arisen  if  the  Government  could 
have  prevented  it. 

1160.  Chairman."]  The  notion  of  the  convertibility  of 
the  note  being  in  danger  never  crossed  your  mind  ?— 
Never  for  a  moment ;  nothing  of  the  kind. 

1161.  Mr.   Weguelin."]  I  refer  not  to  the  convertibility 
of  the  note,  but  to  the  state  of  the  Banking  Department 
of  the  Bank  of  England  ? — If  we  had  thought  that  there 
was  any  doubt  whatever  about  it,  we  should  have  taken 
our  bank-notes  and  put  them  in  our  own  strong  chest. 
We  could  never  for  a  moment  believe  an  event  of  that 
kind  as  likely  to  happen. 


APPENDIX. 


34i 


1162.  Therefore  you  think  that  the  measure  taken  by 
the  Government,  of  issuing  a  letter  authorising  the  Bank 
of  England  to  increase  their  issues  of  notes  upon  securi- 
ties, was  what  was  generally  expected  by  the  commercial 
world,  and  what  in  future  the  commercial  world  would 
look  to  in  such  a  conjunction  of  circumstances  ? — We 
locked   for  some   measure  of  that   nature.      That,    no 
doubt,  was  the  most  obvious  one.   We  had  great  doubts 
whether  it  would  come  when  it  did,  until  the  very  last 
moment. 

1163.  Have  you  ever  contemplated  the  possibility  of 
the  Bank  refusing  to  advance,  under  circumstances  simi- 
lar to  those  which  existed  in  November,  1857,  upon  good 
banking  securities  ? — Of  course  I  have,  and  it  is  a  very 
difficult  question  to  answer  as  to  what  its  effect  might 
be  ;  but  the  notion  appears  to  me  to  be  so  thoroughly 
ingrained  in  the  minds  of  the  commercial  world,  that 
whenever  you  have  good  security  it  ought  to  be  con- 
vertible at  the  Bank  in  some  shape  or  way,  that  I  have 
very  great  doubt  indeed  whether  the  Bank  can  ever  take 
a  position  to  refuse  to  assist  persons  who  have  good 
commercial  securities  to  offer. 

1164.  Mr.  Cayley.~\  When  you  say  that  you  have  come 
to  some  fresh  arrangement  with  regard  to  your  allow- 
ance of  interest  upon  deposits,  do  you  speak  of  your- 
selves as  the  London  and  Westminster  Bank,  or  of  some 
of  the  other  banks  in  combination  with  yourselves  ? — I 
think  all  the  banks  have  come  to  an  understanding  that 
it  is  not  desirable,  either  for  their  proprietors  or  for  the 
public,  to  follow  closely  at  all  times  the  alterations  of 
the  Bank.     I  believe  it  is  understood  amongst  them  all 
that  they  do  not  intend  following  that  course  in  future. 

1165.  Is  that  from  a  feeling  that  it  is  rather  dangerous 


342  APPENDIX. 

under  particular  circumstances? — I  cannot  admit  as  tf 
its  being  dangerous,  but  there  can  be  no  doubt  of  this, 
that  there  is  a  notion  in  the  public  mind  which  we  ought 
not  to  contend  against,  that  when  you  offer  a  high  rate 
of  interest  for  money,  you  rather  do  it  because  you  want 
the  person's  money,  than  because  you  are  obeying  the 
market  rate  ;  and  I  think  it  is  desirable  that  we  should 
show  that  if  persons  wish  to  employ  their  money,  and 
want  an  excessive  rate,  they  may  take  it  away  and  em- 
ploy it  themselves. 

1166.  You  think  that  there  is  now  a  general  under- 
standing amongst  the  banks  which  you  have  mentioned, 
to  act  upon  a  different  principle  from  that  on  which  they 
acted  during  last  October  and  November  ? — I  think  I 
may  say  that  I  know  that  to  be  the  case. 

1 167.  Was  not  it  the  fact  that  this  system  of  giving  so 
high  a  rate  of  interest  upon  money  at  call  commenced 
very  much  with  the  establishment  of  some  banks  during 
the  last  year  or  two,  which,  instead  of  demanding  10 
days'  or  a  month's  notice,  were  willing  to  allow  interest 
upon  only  three  days'  notice  ;  did  not  that  system  begin 
about  two  years  ago  ? — I  do  not  think  it  began  with  the 
new  banks  ;  I  think  it  began  with  one  of  the  older  banks  ; 
I   know   that  as  regards  my  own  bank,  that  we  were 
forced  into  it  ;  I  forgot  to  say,  that  with  regard  to  our- 
selves in  taking   money  on  deposit,  the   parties   must 
leave  the  money  a  month,  or  they  lose  interest.    We  do 
not  take  money  from  any  depositor  at  interest  unless 
upon  the  understanding  and  condition  that  it  remains  a 
month  with  us  ;  he  may  withdraw  it  within  the  month, 
but  then  he  forfeits  interest ;  it  will  not  carry  interest 
unless  it  is  with  us  a  month,  and  then  it  is  removable  on 
demand  without  notice. 


APPENDIX.  343 

1168.  Is  it  or  is  it  not  a  fact  that  some  of  the  banks 
pay  interest  upon  their  current  accounts  ? — Yes,  I  think 
most  of  the  new  banks  do  so  ;  and  the  Union  Bank  of 
London  does  it. 

1169.  At  a  smaller  rate  than  upon  their  deposits,  I 
presume  ? — I  think  at  a  smaller  rate,  but  I  believe  it  is 
a  fixed  rate  on  the  minimum  balance  for  some  period, 
either  six  months  or  one  month,  I  do  not  exactly  know 
the  period.     I  think  I  ought  to  add  (and  I  believe  it  is 
the  case  with  all  the  banks)  that  the  London  and  West- 
minster Bank,  from  the  day  of  its  first  institution  until 
the  present  day,  has  never  re-discounted  a  bill.     No  bill 
has  ever  left  our  bank  unless  it  has  been  for  payment. 

1170.  Is  not  that  generally  the  case  with  the  London 
joint  stock  banks  ? — I  believe  it  is  the  case. 

1171.  Mr.  WeguelinJ\  But  you  sometimes  lend  money 
upon  bills  deposited  with  you  by  bill-brokers  ? — Yes. 

1172.  And  you  occasionally  call  in  that  money  and 
re-  deliver  those  securities  ? — Yes  ;  but  that  we  do  to  a 
very  small  extent. 

1173.  Is  not  that  equivalent  to  a  re-discount  of  bills  ? 
— No  ;  the  discount  of  a  bill  and  the  lending  money  on 
bills  are  very  different  things.     When  we  discount  a  bill, 
that  bill  becomes  our  property  ;  it  is  in  our  control,  and 
we  keep  it  and  lock  it  up  until  it  falls  due  ;  but  when 
brokers  come  to  us  and  want  to  borrow,  say  5o,ooo/.  on 
a  deposit  of  bills,  and  we  let  them  have  the  money  and 
afterwards  return  those  bills  to  them  and  we  get  back 
our  money,  surely  that  is  not  a  re-discount. 

1174.  When  you  want  to  employ  your  money  for  a 
short  period,  do  you   not  frequently  take  bills  of  long 
date,  and  advance  upon  them  ? — But  that  is  not  a  ic- 
discount  on  our  part.     Very  often  brokers  in  borrowing 


344 


APPENDIX. 


money  send  in  bills  of  long  date,  and  afterwards  we  caK 
in  that  loan ;  but  that  is  no  more  a  re-discount  than 
lending  money  upon  consols  and  calling  in  that  money 
again.  It  is  not  an  advance  of  ours ;  we  do  not  seek  it ; 
they  come  to  us  and  borrow  our  money,  and  give  us  a 
security  ;  when  we  want  our  money  we  call  for  that 
money,  and  return  their  security.  Surely  that  is  not  a 
re-discount. 

1175.  Mr.  HankeyJ\  Is  there  not  this  clear  distinction 
between  returning  a  bill  on  which  you  have  made  an 
advance  and  discounting  a  bill,  that  if  you  have  dis- 
counted a  bill  your  liability  continues  upon  the  bill  until 
that  bill  has  come  to  maturity  ? — Yes. 

1176.  In  the  other  case  you  have  no  further  liability 
whatever  ? — Certainly. 

1177.  Should  you  not  consider  that  a  very  important 
distinction  ? — I   think   it   is   an    important  distinction. 
Take  this  case  :  suppose  a  party  comes  to  us  and  bor- 
rows  5o,ooo/.,  and  we  lend  it  him,  and  when  the  loan 
becomes  due  we  take  our  money  back  again.     Surely 
that  is  not  a  discount  on  our  part. 

1178.  Is   there   not   this  distinction,   that  if  you  re- 
discount you  may  go  on  pledging  the  liability  of  your 
bank  to  an  almost  unlimited   amount,   whereas  in  the 
other  case  you  only  get  back  that  money  which  you  have 
lent  ? — Undoubtedly. 

1179.  Mr.  Cay  ley. ~\  The  late  Chancellor  of  the  Ex- 
chequer stated  before  the  adjournment,  in  a  speech  in 
the  House  of  Commons,  that  during  the  Monday,  Tues- 
day, Wednesday,  and  Thursday  of  the  panic,  the  IJank 
was  almost,  if  not  entirely,  the  only  body  that  discounted 
commercial  bills;  how  can  you  reconcile  that  with  what  you 
have  said,  that  you  gave  as  much  accommodation  as  usual 


APPENDIX.  345 

to  your  customers  ? — -I  am  not  responsible  for  what  the 
Chancellor  of  the  Exchequer  said  ;  I  am  responsible  for 
what  I  am  now  stating  as  to  the  course  of  our  bank,  that 
our  advances  to  our  customers  on  the  3ist  of  December 
were  nearly  5OO,ooo/.  higher  than  they  were  on  the  3ist 
of  October.  With  regard  to  our  not  discounting  for 
other  parties,  it  was  in  consequence  of  the  discredit  which 
prevailed,  that  it  was  necessary  we  should  hold  a  portion 
of  our  deposits  in  order  that  they  should  be  available  in 
case  persons  called  for  them  ;  a  certain  number  of  per- 
sons did  so  ;  in  the  month  of  November  we  had  a  re- 
duction of  our  deposits,  and  if  we  had  gone  on  discount- 
ing for  brokers  we  should  have  had  to  go  into  the  market 
ourselves  to  raise  money  on  our  Government  securities,, 
but  we  avoided  that  by  not  discounting,  and  leaving  our 
money  at  the  Bank  of  England. 

1180.  Then  you  did  not  discount  as  much  as  usual 
for  your  customers  during  that  period  ? — Yes,  we  did, 
and  more. 

1181.  But  not  to   strangers? — Not   to  strangers;    I 
make  a  distinction  between  our  transactions  with  our 
customers,  who  of  course  expect  us  to  give  accommoda- 
tion, and  discounts  for  brokers,  which  is  entirely  volun- 
tary, depending  upon  our  having  money  to  employ. 

1182.  How  would  it  have  been  if  the  letter  had  not 
issued  at  the  last  moment  ? — That  is  a  question  which  I 
can  hardly  answer. 

1183.  What  do  you  mean  by  that  general  expression 
of  yours? — It  is  impossible  to  predicate  what  may  hap- 
pen in  time  of  panic  and  alarm.     A  great  alarm  prevailed 
certainly  amongst  the  commercial  world,  and  it  could 
never  have  been  alleviated,  except  by  some  extraordi- 
nary means  of  relief.     We  might  probably  have  been  in 

15* 


346  APPENDIX. 

the  state  in  whieh  Hamburg  was,  where  they  have  no 
bank-notes  in  circulation. 

1184.  Mr.  Spooner.~\  What  did  you  mean  by  the  ex- 
pression, '  the  last  moment '  ?     You  said  that  the  letter 
came  out  at  the  last  moment ;  the  last  moment  of  what  ? 
— It  was  late  in  the  day ;  it  was  a  day  of  great  distress. 
For  two  days  there  was  a  great  deal  of  anxiety,  and 
everybody  expected  that  there  would  be  some  relief; 
and  it  was  when  expectation,  I  suppose,  was  highly  ex- 
cited that  the  letter  came,  and  it  gave  relief. 

1185.  Cannot  you  tell  us  what  your  opinion  would 
have  been,  if  that  last  moment  had  happened  to  have 
elapsed,  and  the  letter  had  not  come  ? — It  is  very  diffi- 
cult to  say  ;  it  is  too  much  to  say  that  it  could  not  have 
been  got  over.     There  can  be  no  doubt  whatever  that 
what  created  the  difficulty  existed  out  of  London,  and 
not  in  it ;  and  therefore  it  is  much  more  difficult  for  me 
to  give  an  opinion.     I  believe  that  the  banking  interest, 
both  private  and  joint  stock,  was  in  a  perfectly  sound 
condition,  and  able  to  bear  any  strain  which  might  have 
been  brought  upon  it  in  London. 

1 1 86.  Mr.  Hankey.]  Can  you  give  the  Committee  any 
idea   as  to  what  proportion  of  deposits   you   consider 
generally  desirable  to  keep  in  reserve  ? — You  must  be 
very  much  guided  by  circumstances.     In  times  of  alarm, 
when  there  are  failures,  of  course  all  bankers  strengthen 
their  reserves  ;    our  reserve  then  is  larger.     In  times  ol 
ordinary  business  we  find,  both  as  regards  our  deposit? 
at  interest  as  well  as  those  which  are  not  at  interest,  that 
there  is  a  constant  circulation  ;  that  the  receipts  of  money 
very  nearly  meet  the  payments. 

1 187.  You  probably  keep  at  all  times  a  certain  amount 
of  your  deposits  totally  unemployed ;  in  reserve  ? — Yes, 


APPENDIX.  347 

1188.  In  a  normal  state  of  commercial  affairs,  is  there 
any  fixed  proportion,  or  can  you  give  the  Committee 
any  idea  of  what  you  would  consider  about  a  fair  and 
desirable   proportion  which  should  be  so  kept  unem- 
ployed ? — I  think  the  best  idea  which  I  can  give  upon 
that  subject  is  to  give  our  annual  statement,  or  balance 
sheet,  for  the  3ist  of  December. 

1189.  Does  that  show  what  amount  of  unemployed 
money  you  had  on  that  day  ? — Yes.     I  will  put  in  a 
statement,  which  perhaps  will  be  the  best  means  of  meet- 
ing the  question,  showing  the  cash  in  hand  on  the  3Oth 
of  June  and  the  3 1  st  of  December  in  every  year,  as  shown 
by  our  published  accounts,  together  with  our  money  at 
call  and  our  Government  securities  ;  that  will  be  perhaps 
the  best  and  most  convenient  way  of  giving  the  informa- 
tion you  desire  to  have.     (See  Table  on  next  page.} 

1 190.  Do  you  consider  that  when  your  deposits  are 
materially  on  the  increase  it  is  necessary  to  keep  a  larger 
amount  of  money  in  reserve  than  you  would  keep  at 
other  times  ? — I  may  say  that,  as  a  general  rule,  our 
reserve   would   always   bear   some   proportion   to   our 
deposits. 

1191.  Do  you  employ  your  money  in  the  discounting 
of  bills  for  other  persons  than  your  own  customers  ? — 
Discount  brokers. 

1 192.  Only  to  discount  brokers  ? — Yes. 

1193.  Not  to  strangers  who  are  in  the  habit  of  bring- 
ing you  in  bills  ;    commercial  houses  ? — I  should  say 
generally  not.     We  have  one  or  two  houses  for  whom 
we  discount  who  have  not  accounts  with  us  as  bankers, 
but  generally  we  do  not  discount  except  for  our  custom- 
ers or  for  bill-brokers. 

1194.  Do  you  consider  that  any  advantage  can  arise 


348 


APPENDIX. 


Total  Lodgments  with  London  and  Westminster  Bank ;  also  Amtwnt 
of  Cash  in  Hand,  Moneys  "with  Bill-Brokers  at  Call,  and  Govern  nient 
Securities  held  by  the  Bank. 


DATE. 

Deposits. 

Cash  in 
Hand. 

Money  at 
Call. 

Government 
Securities 

TOTAL. 

£ 

£ 

£ 

£ 

£ 

31  December  1845 

3,590,014 

563,072 

628,500 

1,039,745 

2,231,317 

1846 

3,280,864 

634,575 

423,060 

938,717 

1,996,352 

1847 

2,733,753 

721,325 

350,  108 

791,899 

1,863,332 

•ap  June           1848 

3,170,118 

588,871 

159,724 

1,295,047 

2,043,642 

31  December    „ 

3,089,659 

645,468 

176,824 

1,189,213 

2,011,505 

30  June           1849 

3,392,857 

552,642 

246,494 

964,  800 

1,763,936 

31  December    ,, 

3,680,623 

686,761 

263,577 

973,691 

1.224,029 

30  June           1850 

3,821,022 

654,649 

258,177 

972,055 

1,884,881 

31  December    ,, 

3,969,648 

566,039 

334,982 

1,089,794 

1,990,815 

30  June           1851 

4,4M,i79 

691,719 

424,195 

1,054,018 

2,169,932 

31  December    ,, 

4,677,298 

653,946 

378,337 

1,054,018 

2,080,301 

30  June           1852 

5,245,135 

861,778 

206,687 

1,054,018 

2,122,483 

31  December    ,, 

855,057 

397,o87 

1,119,477 

2,371,621 

30  June           1853 

6,219,817 

904,252 

499,46711,218,852 

2,622,571 

31  December    ,, 

6,259,540 

791,699 

677,392 

1,468,902 

2,937,993 

30  June           1854 

6,892,470 

827,397 

917,557 

1,457,415 

3,202,369 

31  December    ,, 

7,177,244 

694,309 

486,  400 

1,451,074 

2,631,783 

30  June           1855 

8,166,553 

722,243 

483,890  1,754,074 

2,960,207 

31  .December    ,, 

8,744,095 

847,856 

451,575 

1,949,074 

3,248,505 

30  June           1856 

11,170,010 

906,876 

601,800 

1,980,489 

3^489,165 

31  December    ,, 
30  June           1857 
31  December    „ 

11,438,461 
13,913,058 
13,889,021 

967^078 
2,226,441 

432,0002,922,625 
687,730  3,353,179 
1,115,883,3,582,797 

4,474,2i6 
5,007,987 
6,925,121 

to  the  public  by  the  Bank  of  England  advancing  to  a 
greater  extent  than  can  be  considered  strictly  prudent  on 
the  soundest  principle  of  banking,  under  the  idea  of  their 
affording  aid  to  the  commercial  world  ? — As  I  said 
before,  as  long  as  there  are  good  bills  in  circulation,  that 
is,  bills  about  which  there  would  be  no  doubt  of  their 
being  paid  at  maturity,  there  should  be  some  means  by 
which  those  bills  could  be  discounted. 

1 195.  And  do  you  think  that  it  is  part  of  the  functions 


APPENDIX. 


349 


of  the  Bank  of  England  to  discount  a  bill  for  anybody, 
merely  because  the  party  holding  the  bill  \;ishes  to  con- 
vert it  into  cash  ? — As  I  said  before,  the  Bank  of  England 
will  have  great  difficulty  in  getting  rid  of  that  inconveni- 
ent idea  which  there  is  in  the  mind  of  the  public,  that 
the  Bank  of  England  is  something  more  than  an  ordinary 
joint  stock  bank.  I  think  it  must  depend  very  much 
upon  circumstances  whether  you  can  or  cannot  refuse 
the  discount  of  good  bills  which  are  offered  to  you. 


L  I  i 


NOTE  C. 


STATEMENT  OF  CIRCULATION  AND  DEPOSITS  OF  THE 
BANK  OF  DUNDEE  AT  INTERVALS  OF  TEN  YEARS  BE- 
TWEEN  1764  AND  1864. 


Year. 

Circulation. 

Deposits.  * 

f 

£ 

1764 

3o>395 

1774 

27,670 

— 

1784 

56,342 

— 

1794 

50,254 

48,809 

1804 

54,096 

157,821 

1814 

46,627 

445,066 

1824 

29,675 

343J948 

LI  834 

26,467 

563,202 

1844 

27,504 

535,253 

I854 

4o>774 

705,222 

1864 

41,118 

684,898 

*The  Bank  did  not  begin  to  receive  deposits  until  1792,   if 
which  year  they  amounted  to  35,944/. 


350  APPf.NDIX. 

NOTE  D. 

MEETING    OF    THE     PROPRIETORS    OF    THE    BANK    OF 
ENGLAND. 

September  13,  1866. 
(From  ''Economist?  September  22,  1866.) 

A  General  Court  of  the  Bank  of  England  was  held  at 
the  Bank  at  twelve  o'clock  on  the  I3th  instant,  for  the 
purpose  of  declaring  a  dividend  for  the  past  half-year. 

Mr.  Launcelot  Holland,  the  Governor  of  the  Bank, 
who  presided  upon  the  occasion,  addressed  the  propri- 
etors as  follows  : — This  is  one  of  the  quarterly  general 
courts  appointed  by  our  charter,  and  it  is  also  one  of  our 
half-yearly  general  courts,  held  under  our  bye-laws,  for 
the  purpose  of  declaring  a  dividend.  From  a  statement 
which  I  hold  in  my  hand  it  appears  that  the  net  profits 
of  the  Bank  for  the  half-year  ending  on  the  3ist  of 
August  last  amounted  to  970,0147.  ijs.  lod.  ;  making 
the  amount  of  the  rest  on  that  day  3,981,7837.  185.  lid.  ; 
and  after  providing  for  a  dividend  at  the  rate  of  6/.  105. 
per  cent.,  the  rest  will  stand  at  3,035,8387.  iSs.  lid. 
The  court  of  directors,  therefore,  propose  that  a  half- 
yearly  dividend  of  interest  and  profits,  to  the  amount  of 
6/.  lOs.  percent.,  without  deduction  on  account  of  income 
tax,  shall  be  made  on  the  loth  of  October  next.  That 
is  the  proposal  I  have  now  to  lay  before  the  general 
court ;  but  as  important  events  have  occurred  since  we 
last  met,  I  think  it  right  I  should  briefly  advert  to  them 
upon  this  occasion.  A  great  strain  has  within  the  last 
few  months  been  put  upon  the  resources  of  this  house, 
and  of  the  whole  banking  community  of  London  ;  and  I 


APPENDIX.  351 

think  I  am  entitled  to  say  that  not  only  this  house  but 
the  entire  banking  body  acquitted  themselves  most 
honourably  and  creditably  throughout  that  very  trying 
period.  Banking  is  a  very  peculiar  business,  and  it 
depends  so  much  upon  credit  that  the  least  blast  of  sus- 
picion is  sufficient  to  sweep  away,  as  it  were,  the  harvest 
of  a  whole  year.  But  the  manner  in  which  the  banking 
establishments  generally  of  London  met  the  demands 
made  upon  them  during  the  greater  portion  of  the  past 
half-year  affords  a  most  satisfactory  proof  of  the  sound- 
ness of  the  principles  on  which  their  business  is  conducted. 
This  house  exerted  itself  to  the  utmost — and  exerted 
itself  most  successfully — to  meet  the  crisis.  We  did  not 
flinch  from  our  post.  When  the  storm  came  upon  us,  on 
the  morning  on  which  it  became  known  that  the  house  of 
Overend  and  Co.  had  failed,  we  were  in  as  sound  and 
healthy  a  position  as  any  banking  establishment  could 
hold ;  and  on  that  day  and  throughout  the  succeeding 
vveek,  we  made  advances  which  would  hardly  be  credited. 
I  do  not  believe  that  any  one  would  have  thought  of 
predicting,  even  at  the  shortest  period  beforehand,  the 
greatness  of  those  advances.  It  was  not  unnatural  that 
in  this  state  of  things  a  certain  degree  of  alarm  should 
have  taken  possession  of  the  public  mind,  and  that  those 
who  required  accommodation  from  the  Bank  should  have 
gone  to  the  Chancellor  of  the  Exchequer  and  requested 
the  Government  to  empower  us  to  issue  notes  beyond 
the  statutory  amount,  if  we  should  think  that  such  a 
measure  was  desirable.  But  we  had  to  act  before  we 
could  receive  any  such  power,  and  before  the  Chancellor 
of  the  Exchequer  was  perhaps  out  of  his  bed  we  had 
advanced  one-half  of  our  reserves,  which  were  certainly 
thus  reduced  to  an  amount  which  we  could  not  witness 


352  APPENDIX. 

without  regret.  But  we  could  not  flinch  from  the  duty 
which  we  conceived  was  imposed  upon  us  of  supporting 
the  banking  community,  and  I  am  not  aware  that  any 
legitimate  application  for  assistance  made  to  this  house 
was  refused.  Every  gentleman  who  came  here  with 
adequate  security  was  liberally  dealt  with,  and  if  accom- 
modation could  not  be  afforded  to  the  full  extent  which 
was  demanded,  no  one  who  offered  proper  security  failed 
to  obtain  relief  from  this  house.  I  have  perhaps  gone  a 
little  more  into  details  than  is  customary  upon  these  oc- 
casions, but  the  times  have  been  unusually  interesting, 
and  I  thought  it  desirable  to  say  this  much  in  justifica- 
tion of  the  course  adopted  by  this  house  of  running  its 
balances  down  to  a  point  which  some  gentlemen  may 
consider  dangerous.  Looking  back,  however,  upon 
recent  events,  I  cannot  take  any  blame  to  this  court  for 
not  having  been  prepared  for  such  a  tornado  as  that 
which  burst  upon  us  on  the  nth  of  May ;  and  I  hope 
the  court  of  proprietors  will  feel  that  their  directors 
acted  properly  upon  that  occasion,  and  that  they  did  their 
best  to  meet  a  very  extraordinary  state  of  circumstances. 
I  have  now  only  to  move  that  a  dividend  be  declared  at 
the  rate  of  61.  ios.  per  cent,  for  the  past  half-year. 

Mr.  Hyam  said  that  before  the  question  was  put  he 
wished  to  offer  a  few  observations  to  the  court.  He 
believed  that  the  statement  of  accounts  which  had  just 
been  laid  before  them  was  perfectly  satisfactory.  He 
also  thought  that  the  directors  had  done  their  best  to 
assist  the  commercial  classes  throughout  the  late  mone- 
tary crisis  ;  but  it  appeared  to  him  at  the  same  time  that 
they  were  in  fault  in  not  having  applied  at  an  earlier 
period  to  the  Chancellor  of  the  Exchequer  for  a  suspen  • 
sion  of  the  Bank  Act.  It  was  well  known  that  the 


APPENDIX. 

demand  on  the  Bank  was  materially  lessened  in  the 
earlier  part  of  the  day,  in  consequence  of  a  rumour  which 
had  been  extensively  circulated  that  permission  to  over- 
step the  limits  laid  down  in  the  Act  had  been  granted. 
That  concession,  however,  had  only  been  made  after  the 
most  urgent  representations  had  been  addressed  to  the 
Chancellor  of  the  Exchequer  at  a  late  hour  in  the  night, 
and  if  it  had  then  been  refused  he  felt  persuaded  that  the 
state  of  affairs  would  have  been  much  worse  on  the 
Saturday  than  it  had  been  on  the  Friday.  The  fact  was 
that  the  Act  of  1844  was  totally  unsuited  to  the  present 
requirements  of  the  country,  which  since  that  period  had 
tripled  or  quadrupled  its  commerce  ;  and  he  was  sorry 
to  know  that  the  measure  seemed  to  meet  with  the  ap- 
proval of  many  of  their  directors.  Any  one  who  read 
the  speeches  made  in  the  course  of  the  discussion  on 
Mr.  Watkins'  motion  must  see  that  the  subject  called  for 
further  inquiry  ;  and  he  trusted  that  the  demand  for  that 
inquiry  would  yet  be  conceded. 

Mr.  Jones  said  he  entirely  dissented  from  the  views 
with  respect  to  the  Bank  Act  entertained  by  the  hon. 
proprietor  who  had  just  addressed  the  court.  In  his 
opinion  the  main  cause  of  the  recent  monetary  crisis  was 
that,  while  we  had  bought  275,000,0007.  worth  of  foreign 
produce  in  the  year  1865,  the  value  of  our  exports  had 
only  been  i65,ooo,ooo/. ,  so  that  we  had  a  balance  against 
us  to  the  amount  of  I  io,ooo,ooo/.  He  believed  that  the 
Bank  acted  wisely  in  resisting  every  attempt  to  increase 
the  paper  currency,  and  he  felt  convinced  that  the  work- 
ing classec  would  be  the  people  least  likely  to  benefit  by 
the  rise  ii\  prices  which  would  take  place  under  such  a 
change. 

Mr.  Moxon  said  he  should  be  glad  to  know  what  was 


354 


APPENDIX. 


the  amount  of  bad  debts  made  by  the  Bank  during  the 
past  half-year.  It  was  stated  very  confidently  out  of 
doors  that  during  that  period  the  directors  had  between 
3$ooo,ooo/.  and  4,000, ooo/.  of  bills  returned  to  them. 

The  Governor  of  the  Bank. — May  I  ask  what  is  your 
authority  for  that  statement  ?  We  are  rather  amused  at 
hearing  it,  and  we  have  never  been  able  to  trace  any 
rumour  of  the  kind  to  an  authentic  source. 

Mr.  Moxon  continued — Whether  the  bad  debts  were 
large  or  small,  he  thought  it  was  desirable  that  they  should 
all  know  what  was  their  actual  amount.  They  had  been 
told  at  their  last  meeting  that  the  Bank  held  a  great  many 
railway  debentures  ;  and  he  should  like  to  know  whether 
any  of  those  debentures  came  from  railway  companies 
that  had  since  been  unable  to  meet  their  obligations.  He 
understood  that  a  portion  of  their  property  was  locked  up 
in  advances  made  on  account  of  the  Thames  Embank- 
ment, and  in  other  ways  which  did  not  leave  the  money 
available  for  general  banking  and  commercial  purposes ; 
and  if  that  were  so,  he  should  express  his  disapproval  of 
such  a  policy.  There  was  another  important  point  to 
which  he  wished  to  advert.  He  was  anxious  to  know 
what  was  the  aggregate  balance  of  the  joint  stock  banks 
in  the  BNank  of  England.  He  feared  that  some  time  or 
other  the  joint  stock  banks  would  be  in  a  position  to  com- 
mand perhaps  the  stoppage  of  the  Bank  of  England.  If 
that  were  not  so,  the  sooner  the  public  were  fully  in- 
formed upon  the  point  the  better.  But  if  ten  or  twelve 
joint  stock  banks  had  large  balances  in  the  Bank  of  Eng- 
land, and  if  the  Bank  balances  were  to  run  very  low, 
people  would  naturally  begin  to  suspect  that  the  joint 
stock  banks  had  more  power  over  the  Bank  of  England 
than  they  ought  to  have.  He  wished  further  to  ask 


APPENDIX.  355 

whether  the  directors  had  of  late  taken  into  consideration 
the  expediency  of  paying  interest  on  deposits.  He  be- 
lieved that  under  their  present  mode  of  carrying  on  their 
business  they  were  foregoing  large  profits  which  they 
might  receive  with  advantage  to  themselves  and  to  the 
public ,  and  he  would  recommend  that  they  should 
undertake  the  custody  of  securities  after  the  system 
adopted  by  the  Bank  of  France.  In  conclusion,  he  pro- 
posed to  move  three  resolutions,  for  the  purpose  of  pro- 
viding, first,  that  a  list  of  all  the  proprietors  of  Bank 
stock  should  be  printed,  with  a  separate  entry  of  the 
names  of  all  those  persons  not  entitled  to  vote  from  the 
smallness  of  their  stock,  or  from  the  shortness  of  time 
during  which  they  held  it ;  secondly,  that  a  copy  of  the 
charter  of  the  Bank,  with  the  rules,  orders,  and  bye-laws 
passed  for  the  good  government  of  their  corporation, 
should  be  printed  for  the  use  of  the  shareholders  ;  and 
thirdly,  that  auditors  should  be  appointed  to  make  de- 
tailed audits  of  their  accounts. 

Mr.  Gerstenberg  recommended  that  the  directors 
should  take  some  step  for  the  purpose  of  preventing  the 
spread-  of  such  erroneous  notions  as  that  which  lately 
prevailed  on  the  Continent,  that  the  Bank  was  about  to 
suspend  specie  payments. 

Mr.  W.  Botly  said  he  wished  to  see  the  directors  tak- 
ing into  their  consideration  the  expediency  of  allowing 
interest  on  deposits. 

Mr.  Alderman  Salomons  said  he  wished  to  take  that 
opportunity  of  stating  that  he  believed  nothing  could  be 
more  satisfactory  to  the  managers  and  shareholders  of 
joint  stock  banks  than  the  testimony  which  the  Governor 
of  the  Bank  of  England  had  that  day  borne  to  the  found 
and  honourable  manner  in  which  their  business  \\ascon- 


356  APPENDIX. 

ducted.  It  was  manifestly  desirable  that  the  joint  stock 
banks  anil  the  banking  interest  generally  should  work  in 
harmony  with  the  Bank  of  England  ;  and  he  sincerely 
thanked  the  Governor  of  the  Bank  for  the  kindly  manner 
in  which  he  had  alluded  to  the  mode  in  which  the  join* 
stock  banks  had  met  the  late  monetary  crisis. 

The  Governor  of  the  Bank  said — Before  putting  the 
question  for  the  declaration  of  a  dividend,  I  wish  to  refer 
to  one  or  two  points  that  have  been  raised  by  the  gentle- 
men who  have  addressed  the  court  on  this  occasion.  The 
most  prominent  topic  brought  under  our  notice  is  the 
expediency  of  allowing  interest  on  deposits  ;  and  upon 
that  point  I  must  say  that  I  believe  a  more  dangerous 
innovation  could  not  be  made  in  the  practice  of  the  Bank 
of  England.  The  downfall  of  Overend  and  Gurney,  and 
of  many  other  houses,  must  be  traced  to  the  policy  which 
they  adopted  of  paying  interest  on  deposits  at  call,  while 
they  were  themselves  tempted  to  invest  the  money  so 
received  in  speculations  in  Ireland  or  in  America,  or  at 
the  bottom  of  the  sea,  where  it  was  not  available  when 
a  moment  of  pressure  arrived. 

Mr.  Botly  said  he  did  not  mean  deposits  on  call. 

The  Governor  of  the  Bank  of  England  continued — • 
That  is  only  a  matter  of  detail  ;  the  main  question  is 
whether  we  ought  to  pay  interest  on  deposits,  and  of 
such  policy  I  must  express  my  entire  disapproval.  Mr. 
Moxon  has  referred  to  the  amount  of  our  debts,  but,  as 
I  stated  when  I  took  the  liberty  of  interrupting  him,  we 
could  never  trace  the  origin  of  any  rumour  which  prevailed 
upon  that  subject.  As  far  as  it  can  be  said  to  have  ever 
existed  it  had  its  origin  most  probably  in  the  vast  amount 
advanced  by  the  Bank.  It  must,  however,  be  remem- 
bered that  we  did  not  make  our  advances  without  ample 


APPENDIX.  357 

security,  and  the  best  proof  of  that  is  the  marvellously 
small  amount  of  bad  debts  which  we  contracted.  It  has 
never  been  a  feature  of  the  Bank  to  state  what  was  the 
precise  amount  of  those  debts  ;  but  I  believe  that  if  I 
were  to  mention  it  upon  the  present  occasion,  it  would 
be  found  to  be  so  inconsiderable  that  I  should  hardly 
obtain  credence  for  the  announcement  I  should  have  to 
make.  I  am  convinced  that  our  present  dividend  has 
been  as  honestly  and  as  hardly  earned  as  any  that  we 
have  ever  realised  ;  but  it  has  been  obtained  by  means 
of  great  vigilance  and  great  anxiety  on  the  part  of  each 
and  all  of  your  directors  ;  and  I  will  add  that  I  believe 
you  would  only  diminish  their  sense  of  responsibility, 
and  introduce  confusion  into  the  management  of  your 
business,  if  you  were  to  transfer  to  auditors  the  making 
up  of  your  accounts.  If  your  directors  deserve  your  con- 
fidence they  are  surely  capable  of  performing  that  duty, 
and  if  they  do  not  deserve  it  you  ought  not  to  continue 
them  in  their  present  office.  With  regard  to  the  sup- 
posed lock-up  of  our  capital,  I  must  observe  that,  with 
i4,ooo,ooo/.  on  our  hands,  we  must  necessarily  invest  it 
in  a  variety  of  securities  ;  but  there  is  no  ground  for 
imagining  that  our  money  is  locked  up  and  is  not  avail- 
able for  the  purpose  of  making  commercial  advances. 
We  advanced  in  the  space  of  three  months  the  sum  of 
45 ,ooo,ooo/. ;  and  what  more  than  that  do  you  want  ? 
It  has  been  recommended  that  we  should  take  charge  ol 
securities;  but  we  have  found  it  necessary  to  refuse  all 
securities  except  those  of  our  customers  ;  and  I  believe 
the  custody  of  securities  is  becoming  a  growing  evil. 
With  regard  to  railway  debentures,  I  do  not  believe  we 
have  one  of  a  doubtful  character.  We  have  no  deben- 
tures except  those  of  first-class  railway  companies  and 


35« 


APPENDIX. 


companies  which  we  know  are  acting  within  theif 
Parliamentary  limits.  Having  alluded  to  those  subjects, 
I  will  now  put  the  motion  for  the  declaration  of  the 
dividend. 

The  motion  was  accordingly  put  and  unanimously 
adopted. 

The  chairman  then  announced  that  that  resolution 
should  be  confirmed  by  ballot  on  Tuesday  next,  inas- 
much as  the  Bank  could  not,  under  the  provisions  of  its 
Act  of  Parliament,  declare  otherwise  than  in  that  form  a 
dividend  higher  than  that  which  it  had  distributed  dur- 
ing the  preceding  half-year. 

The  three  resolutions  proposed  by  Mr.  Moxon  were 
then  read  ;  but  they  were  not  put  to  the  meeting,  inas- 
much as  they  found  no  seconders. 

Mr.  Alderman  Salomons  said  that  their  Governor  had 
observed  that  he  thought  the  payment  of  interests  on 
deposits  was  objectionable  ;  and  everyone  must  see  that 
such  a  practice  ought  not  to  be  adopted  by  the  Bank  of 
England.  But  he  took  it  for  granted  that  the  Governor 
did  not  mean  that  his  statement  should  apply  to  joint 
stock  banks  which  he  had  himself  told  them  had  con- 
ducted their  business  so  creditably  and  so  successfully. 

The  Governor  of  the  Bank  said  that  what  he  stated 
was  that  such  a  system  would  be  dangerous  for  the  Bank 
of  England,  and  dangerous  if  carried  into  effect  in  the 
way  contemplated  by  Mr.  Moxon. 

Mr.  P.  N.  Laurie  said  he  understood  the  Governor  oi 
the  Bank  to  say  that  it  would  be  dangerous  to  take 
deposits  on  call,  and  in  that  opinion  he  concurred. 

Mr.  Alderman  Salomons  said  that  he,  too,  was  of  the 
same  opinion. 


APPENDIX.  3  r^ 

On  the  motion  of  Mr.  Alderman  Salomons,  secondc  d 
by  Mr.  Botly,  a  vote  of  thanks  was  passed  to  tl  e 
Governor  and  the  directors  for  their  able  and  successf  il 
management  of  the  Bank  during  the  past  half-yea,*, 
and  the  proceedings  then  terminated. 


14  DAY  USE 

RETURN  TO  DESK  FROM  WHICH  BORROWED 

LOAN  DEPT. 

This  book  is  due  on  the  last  date  stamped  below,  or 

on  the  date  to  which  renewed. 
Renewed  books  are  subject  to  immediate  recall. 


1359 


BEC'DID    APR;:  072  -8PM  6  2 


LD  21A-50m-4,'59 
(A1724slO)476B 


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